Equities are a key part of a diversified investment portfolio

• Shares represent the portion, or equity, that you own in a company
• Returns on equities are through dividends and capital appreciation
• Equities are considered riskier than savings accounts but can provide higher returns

When Khamis was talking about supporting his friend’s new venture financially, he was offered shares in return for his investment. If he accepted the shares, he would have equity in the company. Each unit reflects the proportion that he owns of the company. If the company does well, so does he in the sense that his share becomes more valuable, providing him capital appreciation, or even dividends. Conversely, if the company doesn’t do well, the value of his shares or equity would go down.

Simply defined, equities as an asset class allow investors to participate in a company's financial growth. For companies listed on a stock exchange, an investor does not have to know the company management personally to buy shares or an equity holding. They can buy them from the stock market. Equity trading stands for buying and selling of shares in various stocks listed on the financial markets.

How do equities give returns on investment?

• Capital appreciation: Capital appreciation means that the amount you invested in a company has grown regardless of whether you continued to add to it. Capital appreciation is tied to the company’s growth, increase in its profits, or its value to the market. The price of a company’s shares increases with its value. Each share you own becomes worth more.
• Dividend: Established companies distribute a portion of their profits back to their shareholders. Equities that pay dividends can provide a passive income without actually selling the asset. Companies also offer the option of reinvesting the dividend into its shares instead of a cash payout.

Matching equities to your risk profile

• Are you a trader? Investing in equities is typically a long-term approach, giving time to the company to most effectively utilize the capital it has raised from shareholders. However, a trader is one who buys and sells stocks frequently, relying on short-term price movements rather than company performance for profit. This is a relatively more risky way to invest in equities, as market prices can move up and down very rapidly in short periods.
• Long-term approach: As a part of a diversified portfolio, equities can be more valuable over the long term. Research shows that share prices trend consistently upwards over long periods. An investor is more likely to show profit by holding on to the shares of good, well-researched companies over the long term, even though the price may trend sharply up and down in short bursts in between.
• Risk vs. returns: Equities are riskier than, say, a savings account with a fixed profit rate. However, they have the potential to provide much higher returns than a savings account. The value of equities fluctuates depending on how several factors, including the company’s performance, the state of the industry in which it operates, socio-political factors, and others.

Equities are considered an important part of a diversified investment portfolio that can include several other types of assets.