Demystifying Equities: Investing in Stocks
Investing in equities, widely known as stocks or stocks, is individuals becoming partial owners of a company. Assuming an analogy of a 24-slice pizza being a representation of a company. Individuals can have a slice or more of the 24 slices (the company shares). Every slice is made up of different toppings to make it delicious, those toppings are the share value. Therefore, as an individual owns a part of a company they do it at a price and receive proceeds in return. Worth noting the proceeds can be either profit or a loss.
When one buys stocks, you essentially become a shareholder. This means you have a stake in the success and, other times right to the company profits. Company profits when distributed to shareholders they are referred to as dividends, usually done once or twice in a year. If twice one receives interim dividend and final dividend but if once mostly at end of year its final dividend only. Besides dividends, companies can offer proceeds to shareholders in other ways like discounts, share multiplication etc
Companies issue shares to raise capital for various purposes, varies across companies. Investors buy the shares, become partial owners proportional to the shares they own compared to the total outstanding shares of the company.
Why Invest in Equities
- Wealth creation: With stocks there’s no ceiling to how much gains investors can receive. On good performance periods investors can accumulate their gains to build wealth. The more stocks you buy the higher the possibility to gain more profits when returns are positive. Investors can also build wealth through dividends.
- Diversification: It’s important to spread your investments in different assets to help reduce risk while aiming for higher returns. Having stocks in your portfolio can be beneficial especially when the stocks are performing well.
- Company ownership: Having partial ownership of companies allows one to have the right to participate in the company success, voting rights and dividend distributions when they happen. Investors also get a chance to attend annual genera meetings for the companies where they receive detailed company performance and can offer their opinions.
- Liquidity: Stocks are highly liquid as they can be bought or sold relatively easily on the stock market. Liquidity gives investors the flexibility to adjust their portfolios in respect to preference, market condition or financial goals.
- Hedge against inflation: Inflation affects the purchasing power of investors money. This in most cases results in a hike in stock prices. Investors who opt to sell their stocks are bound to make profits by selling at higher prices than the buying price.
- Accessibility and Flexibility: With the advent of online brokerage platforms, equity investing has become more accessible to a broader range of investors. Investors can buy and sell stocks with relative ease, and the minimum investment amounts are often lower compared to other asset classes. Investors can also have managed shares investing accounts at a small fee.
Disclaimer: Investing in stocks/equities carries risks, and past performance (empirical data) is not indicative of future results. Make sure to do your own due diligence and if you prefer can consult with a financial advisor to guide you before making any investment decisions.Be sure to confirm you are dealing with a registered and approved financial advisor and don’t share your personal details; security details included.
Risks of Investing in Equities
While equities offer the potential for gains, they also come with risks. The value of stocks can fluctuate due to market conditions or company-specific events. It’s important to be aware that investors can make a loss if share value drops.
- Potential loss: Equities come with a great deal of risk which bears huge amount of loss when the share prices drop (price volatility) significantly due to economic/market risks or company-specific events (company risks). Stocks have no floor to how much loss investors can make.
- Capital intensive: Investing in some company shares requires a huge amount of money because their share price is high. Good performance and ability to withstand economic conditions can propel the share prices of such companies which are worth having in your portfolio.
How to Buy Equities
To invest in equities/shares/stocks you need to first understand the asset class. Once you’ve done that, identify a stockbroker through the exchange, Nairobi Securities Exchange (NSE). Contact the preferred stockbroker for further guidance on opening an account with them. Worth noting the list of trading participants facilitate investment in local stocks – from listed companies in Kenya.
Likewise, investors interested in investing in global stocks can do that through digital platforms. Currently, the available platform in Kenya is the Hisa app.
Once you’re set up with the relevant account, you can buy and sell stocks through the stock market. Nowadays, online platforms make it easy for individuals to start investing with just a few clicks.
Long-Term Perspective:
Equity investing is often considered a long-term venture. While stock prices can exhibit price volatility in the short term, historically, the stock market has shown delectable performance over the long term. Patience, consistency (keep buying) and a clear strategy are essential for successful equity investing.