What Are Equities - And How To Invest In Them (2024)

The term ‘equities’ is used to describe units of ownership of a company. It is used alongside ‘stocks’ and ‘shares’, so that someone might be said to have an ‘equity stake’ in a business, own its ‘shares’ or be a ‘stockholder’.

An individual who owns equities, shares or stock is generally known as a shareholder. Shareholders are entitled to receive any dividend payments a company may make.

They also have the right to vote on decisions relating to the business, such as how much the management board is paid, or whether the company should proceed with a merger, acquisition or takeover.

Having equity exposure to a particular company provides shareholders with a direct connection to its performance.

The price of a share tends to rise in value when a company is judged to be performing well. But when the company is regarded as doing badly or its prospects are viewed in a negative light, the share price could move in the other direction.

The volatile nature of investing in equities means, therefore, that this option is not suitable for all investors.

No one knows what will happen in the future but, historically, owning shares has outstripped the returns available from cash over the long term and has been one of the few asset classes providing a ‘real’ return after the effects of inflation are taken into account.

Shares in publicly-listed (as opposed to privately-owned) companies are traded on a stock exchange such as the London Stock Exchange (LSE).

There are various ways for a company to ‘go public’, or ‘float’, but the most common is for the company to hold an initial public offering (IPO).

An IPO offers a company a way to raise money by selling shares in its business. The number of shares issued, multiplied by the price for which they sell, determines a company’s market capitalisation, or ‘market cap’.

When undertaking an IPO, a company appoints advisers, including an investment bank which ‘underwrites’ the deal. This means it commits to buying any shares which remain unsold at the time of the flotation.

Why do companies list on the stock market?

There are several reasons why a company joins the stock market. These include boosting the profile of its business, increasing its credibility with customers and prospective lenders, and potentially using the shares for acquisition purposes. Another main aim is to attract capital from investors.

It is also a way for the founders and staff of a company to profit by selling some of their holdings to new shareholders.

Having floated, a company may follow up with extra shares issues when it needs more cash to finance further growth ambitions.

You can see the companies currently listed on the London Stock Exchange here.

In contrast, a private company neither offers nor trades its shares to the general public on a stock market. Its shares may be held by private individuals, employees, or large-scale investors such as private equity firms.

What markets are available on the London Stock Exchange?

The LSE is one of the world’s oldest stock exchanges allowing companies to issue shares to raise money. Once in issue, shares can be traded by both institutional and retail investors. The former refers to large investment entities such as company pension funds, while the latter includes private investors such as you and me.

The LSE has two markets, the Main Market and the Alternative Investment Market (AIM). These differ in the types of companies that are listed and their respective regulatory requirements.

Last month, the UK’s financial regulator, the Financial Conduct Authority, called for an overhaul of stock market listing rules after several high-profile companies shunned the City of London in favour of Wall Street flotations in the US.

The listing regime covers the rules that companies must follow to be allowed to list their shares in the UK.

Main Market

Well over a thousand companies are listed on the Main Market, including familiar businesses such as Unilever, AstraZeneca and HSBC. Companies are required to meet stringent regulatory requirements before they list on the Main Market.

The Main Market includes three segments covering premium companies, specialist funds and high-growth companies.

Alternative Investment Market

The Alternative Investment Market is also known as the ‘junior market’ and was launched in 1995 to enable small and medium-sized businesses to access funding.

More than 1,200 companies are listed on AIM which, with its lighter regulatory regime, is often used as a launchpad for businesses ultimately setting their sights on a Main Market listing.

Shares occupy different sectors according to the industrial sectors in which they operate. Splitting companies by sector makes it easier for an investor to identify different investment opportunities or concentrate on a particular part of the market, for example, banking or mining.

The UK stock market is open for trading from 8am until 4.30pm, Monday to Friday. During this time the prices of quoted companies will move up and down according to demand and depending on how traders view their prospects.

Several variables affect a company’s share price movements, from the publication of its results to wider news and geo-political events such as inflation or interest rate figures, a political party’s victory in a general election, or the invasion of one country by another.

There are two main ways to invest in the stock market: either by buying shares in a company directly or investing indirectly via several different options including investment funds, investment trusts, and index tracking or exchange-traded funds (ETFs).

Retail investors can buy these investments via products known as general investment accounts (GIA) offered by online trading platforms.

It’s also possible to hold these investments in a tax-efficient ‘wrapper’ such as an Individual Savings Account (ISA) or Self Invested Personal Pension (SIPP).

Buying shares in a company

We’ve listed our pick of the best trading platforms. We have also weighed up the relative merits of a range of investing apps.

Charges are not standard across the board but remain an important factor when choosing a trading service. This is because the more you pay in charges, the less money there is left to actually be invested and ultimately boost returns.

Most, but not all, trading platforms charge a share dealing fee for buying or selling shares, often a flat fee of between £5 to £10 per trade. There will also be a stamp duty fee of 0.5% on the value of the transaction.

You may also have to pay an annual platform fee for holding shares, typically charged as a percentage of the value of your shares.

Investing in individual shares can be an enjoyable and hopefully profitable way to make money from the stock market. However, relying on just one, or a handful, of shares from which to make your fortune is risky because companies, even large ones, can and do go bust, potentially leaving shareholders out of pocket or down the order for compensation from a list of preferred creditors.

Buying shares via investment funds

Investing in ‘collective’ investments, including investment funds, investment trusts and ETFs, helps to reduce risk through a process known as diversification.

These vehicles spread investors’ money across a basket of securities – either hand-picked in the case of ‘active’ investments, or representing a wider investing benchmark such as a stock index in the case of ‘passive’ investments.

Since each fund consists of dozens, if not hundreds, of individual investments, this can provide investors with a good starting point to build a balanced and well-spread portfolio of stocks.