A guide to equities

What are equities?

Equities are what those in the financial markets typically call stocks and shares. Equities represent an ownership share in a company and therefore give the holder a certain amount of influence over how a company is run. Some equities come with voting rights and the ability to give feedback at company meetings. Equities are one of the most common forms of securities investment and the market offers a wide range of equities products.

How do you generate income from equities?

There are two primary ways to generate income through equities. The first is through the equities rising in value, which is known as a capital gain. Selling shares for more than you bought them is an obvious aim for a buyer, although never guaranteed. The second way to generate income is through the distribution of dividends, which is when a company chooses to share profits with shareholders. It is important to remember that dividends are a variable form of income and can be stopped completely if a company deems it necessary.

How risky are equities?

There are a wide range of different equities investments that come with different risk levels. All equities can move up and down in value and investors should know that before they buy. The variable income that comes from dividends is also an important risk to be aware of when investing in equites. A company has discretion over how much of a dividend it pays and whether it pays one at all. This can obviously affect the level of income an investor receives. Holders of equities should also keep in mind that not all companies are created equally. The risk attached to your equity investment is dependent on what it represents, in other words, the quality of the company.

Is it possible to invest in a basket of equities?

One of the easiest ways to invest in a basket of different equities is through an equities fund. Equities funds give an investor access to a variety of different equities without the inconvenience of having to purchase them on an individual basis. An equities fund means you can diversify your risk and not concentrate your investments too narrowly. There are a wide variety of equities funds on the market catering to all preferences. Whether you want to invest in the largest companies in the United Kingdom or French industrials companies, it’s likely there is an equities fund to suit your tastes.

Investors in equities funds should keep in mind that the total value of a fund can be affected when it pays out dividends, but this does not mean an individual investor has sustained a loss.

What is hedging and how can equities be used to achieve it?

Everyone understands what ‘hedging your bets’ means in everyday conversation. You have taken a position on something but you have also taken the opposite position to offset the risk. You might lose on one thing, but you would win on another. You’ve got your sun hat in your bag, but you’ve also got your umbrella. This kind of thinking is pivotal to financial markets and professional investors employ it to manage risk when trading equities. Hedging often involves taking a view on what is an opposite position, and this isn’t always obvious, but let’s say for example an investor viewed global gold companies as a hedge on the FTSE 100, both investments could be held simultaneously in an attempt to offset risk.

What’s the difference between equities and bonds?

There are some key differences between equities and bonds. Both are securities and can rise and fall in value, but bonds are a form of debt that provide a steady and predictable income stream before returning the principal value to the investor upon maturity. Equities represent an ownership share in a company and provide income to a holder in the form of dividends. Unlike bond coupons, dividends are a variable form of income and can be stopped completely if a company deems it necessary.