Shares are equity securities that represent the holder’s rights to a part of the company’s assets and a share in the distribution of profits. Formally, every holder of at least one share is a co-owner of a company which gives them the right to take part in the management of the joint-stock company.
In reality, this mainly applies to strategic investors who have large shareholdings and a vested interest in the business. Small and medium-sized investors have more modest rights and their interests are usually disadvantaged.
Equity investment returns in examples
Investing in securities is always aimed at generating a profit. In the case of shares, this is generated from 2 sources:
- price appreciation;
- dividend payments.
The possibility of receiving dividends and their size depends on the type of security. Holders of preference shares can expect fixed payments, while ordinary shares may not receive dividends. It’s worth noting that dividend yields are generally low.
5 rules for investing in stocks
- Set priorities: If you want to make a big profit, then investing in stocks can be very effective.
- If preservation of your savings is more important to you, then investing in stocks is contraindicated to you.
- Buy stocks on the downside. This will minimise your risk of loss, and if things go well, it will maximise your profit.
- If you are focused on generating a steady, small income, buy cumulative preference shares. Dividends on these are less dependent on a company’s financial performance.
- Those looking for a sudden, large payout should choose common stocks, which have good upside potential. Dividends, in this case, will be a welcome addition to the basic income.
Valuing an equity investment
Expected return on equity is the most important indicator that guides an investor when deciding whether or not to buy a particular security. To calculate its value, mathematical statistical methods are usually used. In addition, various probabilistic methods can be used to determine the expected yield, which estimate the probability of certain events occurring.
Today, stock investments are evaluated using financial analysis methods:
- In terms of interest in dividends – on the basis of the company’s financial statements;
- From the point of view of possible growth of the security’s price – based on the study of prices in the relevant segment of the market.