Your Money - Ask Peter Brooke of Spectrum IFA
April 2009 - What are Equities
April 2009 - What are Equities
Wednesday, August 4, 2010 11:40 AM
What are Equities?
If you make the decision to put money aside for your future it is worth having a basic understanding of all of the various investment options available, for example, the Equity market.
Equities are also known as
stocks or shares.
In order to raise money to help its business operations a company could go to a bank for a loan, it could release a bond, or it could issue shares. Initially a company will issue shares on the PRIMARY market (through an IPO), to present itself to the world and ask us, the investors, to back it with our money.
If we believe that the future of this company looks good then we might invest. We might believe that the company will make enough profits to either reinvest them into itself, become more successful and therefore more attractive to other investors, which will push it’s share price up, or it may distribute some of the profits as a dividend directly to us, the shareholders.
We don’t have to hold onto the shares forever, we can go to the SECONDARY market (the Stock Market) and sell them. The supply and demand nature of the stock market is the main driver behind share price movements. If one company looks significantly more likely to make profits than a competitor then more investors will want to buy its shares to ‘share’ in these future profits. This demand forces the price up. The opposite is obviously true if people no longer feel comfortable owning the shares and decide to sell them.
Buy Low, Sell High…but how?
The most complicated aspect of investing in shares is to know how much the share is really worth and at what price we should buy or sell them. There are many ways of pricing shares, the most popular of which are Earnings per Share (EPS), Price/Earnings (P/E), Dividend Cover and Net Asset Value (NAV). . The complexity of pricing shares correctly is both art and science, and unfortunately beyond the scope of this article. Try to use common sense and have discipline, try not to act on whims.
What affects share prices?
Basically, a combination of supply and demand, political events, legislative changes, inflation, interest rates and other unexpected events. A range of company or sector specific issues can also affect prices (mergers and takeovers, new management and profit predictions or warnings).
How to access the Stock Market…
It's best to have a range of shares (about 20 different companies is sensible) to reduce the risk of your money being over exposed to only a few companies. In order to buy and sell shares we need to use a stockbroker and even though costs have fallen dramatically due to internet based broking, managing a portfolio of 20 shares may still be expensive and time consuming. That's why many people choose to access the stock market through funds. These are collective investments with a professional manager paid to manage everyone’s ‘pooled’ money.
The main advantages of using funds are:
• Someone is always involved in looking at the shares, day in, day out.
• Funds are diversified, sometimes owning up to 200 different companies.
• The costs for buying and selling inside the fund are reduced due to the volumes they trade in.
• Dividends and profits can often be received into the fund without tax payable.
• You, the investor, can access many different markets.
Though shares tend to be more volatile in price they also tend to provide the greatest returns over the long term, this is why they are such a popular choice of investment asset. It is important to monitor them closely but even more important to commit to your long term view without being led astray by short term swings in prices. Disciplined investors tend to do better than those without a planned approach and remember… the value of your investments can fall as well as rise and past performance is not a guarantee of future returns.
This article is for information only and should not be considered as advice.
Peter Brooke is a financial planner to the English speaking expatriate community. He is based on the Cote
D’Azur and is a member and partner with the Spectrum IFA Group. He can be reached on +33 6 87 13 68 71, at firstname.lastname@example.org or at www.spectrum-ifa.com/riviera2.html
This article was published in the April 2009 edition of Dockwalk magazine.
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