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Understanding equities

Equities – also known as stocks or shares – are investments representing fractional or partial ownership in a company which may be listed on the Stock Exchange.

You buy shares in the company and become a shareholder. Equity investments entitle you to a share of the company profits. You will usually receive your share of any profits through a payment called a dividend, which is usually paid twice a year.

When it comes to investing in shares, there’s a great choice on offer. There are large and long-established companies, many of which make up the FTSE 100 – the 100 largest UK companies. There are also smaller, newer companies that make up the Alternative Investment Market (AIM). Share prices can change rapidly and short-term falls or gains in the value of your investments are very common. Frequent price changes are particularly common with smaller, newer companies in the short term, though the long-term rewards can be higher.

Before you choose an investment, you should be aware of the possible rewards and be comfortable with the level of risk involved.

Rewards

Though equities are in a higher-risk class than either deposits or bonds, historically they deliver better returns in the long-term than both of these, and outpace inflation. Equities can deliver income through dividends which can increase over time, meaning income paid to investors can grow, though this cannot be guaranteed.

In the short-term, you can expect prices to fall as well as rise, depending on market conditions. Some of these falls can be very serious so that they don’t perform as well as low-risk investments or even lose value. So the key to successful stock market investment is time – you should only consider this if you can invest for the long-term and if you spread your risk by investing across a range of shares in different industries, sectors or companies.

Risks

The value of shares can fluctuate significantly with economic, market or political conditions – a change of government can send prices up or down depending on their policies. You will need to take a long-term view if you invest in equities as it may take many years to reach your financial goals.

Though you might choose equities to earn income from dividends and capital growth in the long-term, returns are not guaranteed and the value of your shares can fall significantly.

One of the risks of investment in shares is that companies are all different and so the share price of one company will behave differently to another. The ultimate risk is that the company you invest in goes bust and you lose your entire investment. Diversifying your investment by buying shares across a range of companies can reduce this risk. Investing in a Unit Trust or Open Ended Investment Company (OEIC) is one way to do this: a professional manager will pool your capital with that of other investors to spread your investment across a wide variety of companies and industries.

Though equity investments are best seen as long-term, shares can be sold at any time, but the amount you receive could be a lot less than the amount you originally bought for. This is why they are considered higher-risk investments.

Important information

The value of investments and the income from them may fall as well as rise and cannot be guaranteed. Investors may not receive back the full amount originally invested. Past performance is not an indication of future performance.

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