Stocks, also known as equities, are shares of publicly listed companies in the stock exchange.
When you buy a company’s share of stock, you become a shareholder of the company.
Your equity interests in the company are determined by the number of shares you own in proportion to the number of outstanding shares. For example, if a company has 1,000 shares of stock outstanding and you own 100 shares, you will have a claim to 10% of the company's profits.
How are stocks created for trading in the public markets?
As a privately-owned company’s business expands, it may need to raise more money than what a bank can loan it to finance that growth.
One way to raise this money is if the company sells or issues its shares through a process called an initial public offering (IPO).
After an IPO, the company becomes publicly listed on a stock exchange, which makes its shares available for individual investors to buy and sell through brokerages, most of which are online these days.
Why should you invest in equities?
Data spanning numerous decades has shown that across different asset classes, such as stocks, bonds, and commodities — stocks have consistently posted superior returns.
As a shareholder of a company, your equity investment grows with the company’s profitability and the economy. Your return on investment comes from stock price appreciation and sometimes dividend income. This is why stocks are commonly used to build one’s long-term wealth.
Equities offer growth, but they also have a higher risk profile due to price volatility. Such risks can be mitigated by diversifying your investment across different asset classes, thereby locking in the higher returns from equities in the long term while smoothing out its associated volatility.
What makes a good stock investment?
A good stock investment should fulfil your financial goals at the risk tolerance you are able to accept, and generate positive returns.
One starting point is to decide what type of stock is suitable based on the life stage you are in.
If you are a young professional with a focus on wealth building, you might consider stocks that have the capacity for future growth but come with higher risk, such as small-cap and growth stocks.
If you are a retiree with a focus on wealth preservation, you might consider stocks of established businesses that generate stable dividends and whose prices do not swing wildly, such as income and value stocks.
According to analysis by Vanguard, looking at data spanning from 1926 till 2021, the average annual return on stocks was 12.3%. In some years, the stock market could generate higher returns than that, with its best year in that period returning 54.2% (1933); in other years the returns could be lower or even as low as negative -43.1% (1931).
Applying the principle of diversification is always important in investing, especially in a higher risk asset class such as equities.
Spreading your investment across stocks from different geographies, sectors, and market capitalisations will lead to strong and stable returns.
You can easily own a globally diversified equity portfolio using Endowus’ Global Diversified 100% Equities Model Portfolio on our Fund Smart platform.
To get started with Endowus, click here.
<divider><divider>
Risk Warnings
Investment involves risk. Past performance is not an indicator nor a guarantee of future performance. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested.
Opinions
Whilst Endowus HK Limited (“Endowus”) has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies or typographical errors.
Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endowus and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus, its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances.
No invitation or solicitation
Neither the information, nor any opinion, contained in this article constitutes a promotion, recommendation, solicitation, invitation or offer by Endowus or its affiliates to buy or sell any securities, collective investment schemes or other financial instruments or services, nor shall any such security, collective investment scheme, or other financial instruments or services be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction. This is not intended to be an invitation or offer made to the public to subscribe for any financial product or other transaction.
This advertisement has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.
.png)
