Spin-Free Guide to Equities

Contents What are equities? 3 How you could make money from equities 4 Understanding how equities increase or decrease in value 5 Equities compared to other types of investment 6 Are equities right for you? 7 Questions you’ll want to ask before investing 8 Glossary 10 Spin-free guides 11 Please refer to the glossary found on page 10 for an explanation of the words highlighted in bold throughout this guide. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to a financial adviser. The views expressed in this document should not be taken as a recommendation, advice or forecast.

What are An equity is a share in a company Buying shares makes you part-owner of the company equities? Because you are part-owner, the value of your investment will rise or fall with the company’s successes or failures Equities in a nutshell When you buy equities, you become part-owner of the Primary market: when a company sells its shares to company and have a share in its profits. As you buy investors for the first time on a stock exchange, such as more equities, your share in the ownership of the company the London Stock Exchange. This is called an Initial Public becomes greater. You may also have certain voting rights Offering (IPO). IPOs may be available to all investors or if you buy the shares directly; however, generally, you will may be restricted to institutions only, such as pension have very little say in how the company is run. Usually, funds, insurance companies and investment funds. if you own shares with voting rights you will be entitled to one vote per share to elect the board of directors at Secondary market: Once shares are issued through annual general meetings. an initial public offering, they can then be sold and subsequently bought by other investors on the secondary How do they work? market of the stock exchange. That is to say, secondary A company will sell shares to raise money for the business – markets enable the buying and selling of previously to expand, to invest in new ventures, or sometimes to pay owned shares. off its debts. A company may choose to issue and trade shares through the following ways: 3

How you could Income from shares make money from Share prices rise and fall depending on supply and demand. Interpretation equities of company news, economic data and information regarding the industry or competitor companies will all affect the number of buyers and sellers of a share at any point in time. Share prices change constantly and participants in the market will make different assessments of the value of the company. When a company is successful, the price of each share is expected to rise. When it’s less successful, the share price is expected to fall. If you sell shares at a higher price than you bought them, you should make a profit from them. Share prices rise and fall depending Income from dividends on supply and demand You don’t have to sell your shares to make money from them. As a shareholder, you are part-owner of the company you invest in. You can make money from shares if you sell them at a higher price than Sometimes companies choose to give shareholders a percentage of its profits at you paid for them intervals. If the company you invest in does this, you can earn an income through dividends. Dividends are a percentage of profits paid out by the company on a Dividends are another way of regular basis (usually quarterly) directly to its shareholders. making money from shares – this is a percentage of profits from When you’re thinking about investing in equities, you should find out if the company the company distributed to its or companies you’re considering pay out dividends and if so, how they’re paid. shareholders If you’ve invested in equities through a fund (where investors pool their money and a fund manager invests on their behalf), the dividends are paid to the fund. The fund may pass the dividends to its investors in the form of distributions. Before investing, you may wish to find out whether a fund makes distribution payments, and if so, how frequently. More on investing through funds later. As a shareholder, you are part-owner of the company you invest in. 4

Understanding how equities increase or decrease in value How supply and demand affect equities If a lot of investors would like to buy shares in a company, but not many existing shareholders want to sell, this is likely to push the share price up. The opposite is also true – if more people want to sell shares than want to buy them, the price is likely to go down. How a company’s performance affects equities A company will issue statements about its expected earnings and profitability in the coming months and years, and investors use this information to decide whether or not to buy or sell shares. This affects supply and demand, which ultimately determines the share price. How market trends and outside factors can affect equities If reports from research analysts predict a company is likely to do well, this may Supply and demand have a big increase demand for its shares and push up the share price. On the other hand, influence on the value of an equity if the reports say a company will likely perform less well in the future, the share price may fall. If more people want to buy shares in a company, the price is likely to rise – if Outside factors, such as how a competitor company is performing or acquisitions more people want to sell, the price is and mergers, can also influence share prices either positively or negatively. likely to fall Speculation about a company’s stability and future growth can also affect the share price 5

There are many ways to invest your money: in a bank or building society, in property, in Equities compared to bonds or in equities – these are just a few of the options other types of Cash savings are perceived to be the safest way to invest but returns are not high investment Bonds are like a fixed-term loan to a company – they offer the potential for a regular income and tend to be lower risk than property and equities Bonds can give you a regular income through interest payments Equities are higher risk than cash savings or bonds but also offer the most potential for strong growth Differences between equities and bonds Choosing between equities and bonds depends on the level of risk you’re willing to take and whether you want a regular income or you want your initial investment to grow. Equities represent a share in a company’s assets. While equities can enjoy higher returns in the longer term than fixed income securities – also known as bonds – they can also pose greater risk to your capital. Equities could be right for you if you are comfortable with taking a risk and are willing to have a variable income from your dividends or distributions. Bonds are debt instruments and can be particularly attractive if you’re looking for regular income. They are generally seen as a more secure investment when compared with equities because there is an obligation to pay the bond holder back. Income from bonds is usually fixed and the price of bonds tends to be less volatile. Bonds could be right for you if you are less willing to take a risk and want a regular income for a given period of time. A diversified portfolio made up of both bonds and equities could give you more stability as the market rises and falls. 6

Equities could give you higher returns than other investments but they Are equities right are higher risk for you? Equities are more suited to long-term investment – that way your money can ride out short-term dips in the market years. The value of investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested. Equities could grow your money Equities as part of a more than cash or bonds diverse portfolio Looking at past information, shares have tended to perform Choosing equities as part of a diverse portfolio that includes better than investing your money in bonds, cash savings other types of investment, such as bonds or cash savings, or property. Past performance is no guarantee of future means that you could lower your overall risk while still performance. potentially benefiting from the higher returns equities may Up to £75,000 of your money is secure in a bank or building give. The percentage you invest in equities should reflect society through the Financial Services Compensation the level of risk you’re willing to take. Scheme, unlike stocks and shares or fixed interest investments Different ways you can invest which are less secure. in equities Equities can carry more risk Direct: You can invest directly in equities by going through a because they’re unpredictable stockbroker or using an online trading site. This can involve The benefit of equities is that there is no limit to how high time and resources to manage your investments and can the price of a share could rise – no cap on how much you sometimes prove to be expensive. could make from your investment. But with this benefit Fund: invest through a fund and you’ll pool your capital comes a risk – there’s also no limit to how low a share price with other investors to buy equities. Different types of could fall and the company could go bankrupt, making your funds have different investment objectives, for example, shares worthless. investing for capital growth or investing for regular income, Equities are more suited to or sometimes both. long‑term investment Funds typically impose a fee to manage your investments. If you are not looking for a quick return on your money, This is normally referred to as ongoing charges. investing directly in equities or an equity fund may be right for you. Investing for the long term means although there may be short-term dips in the share price from month 7 to month, there could be an overall rise after three to five

What’s the aim of the fund you’re investing in – to grow your money, Questions you’ll want generate a regular income or give you a total return? to ask before What’s the level of risk involved and how will it be minimised by the fund investing manager running it? How does the fund manager engage with company management? Choosing a fund with the right You should also decide on the outcome you’d like from this aims, objectives and charges investment – whether you’d like regular income, long-term growth or both (called a total return) will help you choose Choosing the right equity fund depends on your investment the fund that’s right for you. goals – are you looking for an income from your investment, to grow your initial investment or to benefit from both? How does your fund manager Asking your financial adviser or researching the aims of a engage with company fund and the types of investment it makes will help you decide if it’s right for you. management? Different types of fund and investment companies impose If your fund manager’s investment firm has an analyst team different fees. Therefore, investors should be aware of this to research companies, your fund manager will benefit from when choosing their investments. relevant information about the marketplace. This specialist expertise complements the fund managers’ more generalist Make sure you have determined knowledge and focus. your investment needs and your With this added knowledge, they should be able to make level of risk more informed investment decisions on your behalf. The fund you choose could be a low risk/low return or a high risk/high return fund. You should decide on the level of risk you’re willing to take before looking for the right fund. It is important to understand the level of risk involved in a fund, and the methods by which the fund manager may seek to manage risk. 8

Questions you’ll want to ask before investing continued What is an ongoing charge? Ongoing charges are payments deducted from the assets Tracker fund: a tracker fund follows the ups and downs of of a fund. They only include direct costs to the fund that a market index. Your investment will increase or decrease in will affect the client. This is based on the total of all value in line with the performance of that index. A tracker charges made over a year, and includes charges such as fund is ‘passive’ because it simply follows a chosen index. the fund’s annual management charge, custodian charge and administration charge. Please note, for an actively managed fund, there are typically higher fees imposed than with a passive/tracker Broadly, there are two types fund. of fund: Actively managed fund: this is where an experienced fund manager invests and manages on your behalf. Investing in this way gives you the benefit of the fund manager’s experience and expertise as well as the resources of the investment house they’re part of. 9

Glossary Investment terms The following are explanations of some of the terms you would have come across in this guide. Asset Diversified/Diversification Issue Anything having commercial or exchange value that The practice of investing in a variety of assets. This A set of shares/bonds that were released at a Ais owned by a business, institution or individual. is a risk management technique where, in a well- particular time. Actively managed diversified portfolio, any loss from an individual Issuer Your investment is looked after by a fund manager holding should be offset by gains in other holdings, An entity that sells securities, such as fixed income who will use your invested money (capital) to buy thereby lessening the impact on the overall portfolio. securities and company shares. and sell shares on your behalf, with the aim of Dividends Primary market beating the average stockmarket returns. Dividends represent a share in the profits of Where equities and other securities are sold by the Bond a company and are paid out to a company’s issuer to the purchaser for the first time. A loan in the form of a security, usually issued by shareholders at set times of the year. a government or company, which normally pays a Equities Total return fixed rate of interest over a given time period, at the Shares of ownership in a company. The term for the gain or loss derived from an end of which the initial amount borrowed is repaid. investment over a particular period. Total return Fixed income security includes income (in the form of interest or dividend Capital growth A loan in the form of a security, usually issued by payments) and capital gains. Occurs when the current value of an investment is a government or company, which normally pays a Volatile greater than the initial amount invested. fixed rate of interest over a given time period, at the When the value of a particular share, market or Distributions end of which the initial amount borrowed is repaid. sector swings up and down fairly frequently and/or Refers to the periodic paying-out of interest or Initial Public Offering (IPO) significantly, it is considered volatile. dividends received by funds to their shareholders. The first sale of shares by a private company to Dividends represent a share in the profits of a the public. Z company and are paid out to the owners of company shares at certain times during the year. 10

guides This brochure is part of our range Spin-free guides aim to give you the basics of spin-free guides: about investing, to help you make informed decisions about your financial goals and how Investing to reach them. Equities The value of investments, and the income from them, will fluctuate which will cause the fund price to fall as well as rise and you may not get back the original amount you invested. We are unable to give financial advice. If Risk Income you are unsure about the suitability of your investment, speak to a financial adviser. The views expressed in this document should not be taken as a recommendation, advice or forecast. Bonds Property 11

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