When you buy equity investments, you become a part owner in a business. You may be entitled to vote at the shareholders’ meeting and will receive any profits the company allocates to its shareholders. These profits are called dividends.
The most common type of equity investment is a stock or share. You can make money on a stock in two ways: if the shares increase in value and/or if the company pays a dividend. It is important to remember that there are no guarantees either will happen.
The value of a share can go up or down—sometimes frequently and sometimes by a lot. Factors such as the size, profitability and financial stability of the company, the capability of its management team, general economic conditions, competition and exposure to things like foreign currency risk can all affect a share’s value.
You have not officially gained or lost money on a stock until you sell it. If you sell a stock for more than you paid for it, you will have a capital gain. If you sell it for less, you will have a capital loss.
Compared to fixed income investments, stocks can provide relatively high returns, but you may also have a higher risk of losing some or all of your investment.
Shares are normally traded on stock exchanges, on alternative trading systems or through dealer networks known as over-the-counter (OTC) markets. Shares that trade on stock exchanges are usually quite easy to sell. Shares that do not trade on stock exchanges are often difficult or even impossible to sell.
This has been the seventh post in our Investments at a Glance summer series. As we continue our series next week, we will look at various kinds of shares and related equity investments.
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