Equity investment is the term used for owning one or more shares in a company. This ownership gives you the right to a share in any profits paid out (as dividends) and also allows you to participate in share price growth that results – if and when a company is successful.
Traditionally, equity investments have outperformed investments in other asset classes such as property, bonds and cash over the long term. However, they also carry the risk that you may not get back the amount you started with.
The price of shares on stock markets go up and down on a daily basis. Even when a company is doing well, background economic news or other macro issues can bring their price down while people consider the wider impacts. You may have bought shares in the best company in the world, but if you need to withdraw your investment at a time when sentiment is against you, you will have no choice but to sell at a low price.
More importantly, not all companies will actually be successful. Just because a company is listed on a stock market does not mean it will be good at what it does. Even if it is good at what it does, there is no guarantee that customers will always want to buy its products or services. When such a company does hit problems, the price of its shares can fall drastically – and this could leave you with a loss which you may never recover.
There are therefore two main factors behind successful equity investment – diversification and time.
Past performance is no guide to the future. The value of investments can go down as well as up and you may get back less than you invested.
When investing internationally changes in currency exchange rates may affect the value of an investment. Smaller companies and emerging markets carry higher level of risk than larger, more established companies and markets. Consequently, the suitability of any particular stock market investment depends on your personal circumstances and your attitude to risk.
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