In exchange for cash, an investor can buy a proportion of a company – called a stock or share. If the company does well the share price will go up, and the shareholder can crystallise this gain by selling the share. If the company does badly the share price will fall; this is the risk of being a shareholder and having what is known as equity investments.
Companies with spare cash will often choose to reward loyal shareholders with a pay-out known as a dividend. Large cash-generative companies pay a regular dividend either once, twice or four times a year. If one company buys another, or sells off some assets it may pay a one-off special dividend.
Investors can buy shares in companies that are listed on stock exchanges. These range from the largest companies in the world, known as mega caps, such as global technology stock Apple (AAPL) which has a market capitalisation of more than £850 billion, listed on the NASDAQ market, to grocery delivery company Ocado (OCDO) with a market cap of £1.9 billion which is listed on the growth stock market AIM.
Generally speaking the larger the company the more stable the investment. These megacaps have survived several market cycles, have strong balance sheets and globally diversified revenue streams. They often pay out a share of their profits to investors in the form of dividends. However they do not offer the same potential for growth as smaller companies and so you should not expect much share price inflation.
Not all companies are publicly available for investors. A sole proprietorship is a business owned by just one individual who has full liability. Private investors will not be able to buy shares in these companies and they are not listed on the stock market. These companies raise capital by other means.
In general over the long term investing in equities offers better growth opportunities than investing in bonds. However, equity markets can be volatile and unlike bond yields, dividends are not a fixed income.
There are also unforeseen variables investing in bonds; the departure of a key member of the board, commodity price fluctuations, even government initiatives, can all influence share prices. In fixed income investment your initial outlay is guaranteed to be repaid unless the issuer defaults, whereas shares can drop in value and investors can lose money. That is why it is important to conduct thorough research before making an equity investment.
Morningstar offers research and tools to help investors find suitable equity investments. You can start by finding the latest equity research and information in the Equities section on Morningstar.co.uk. Morningstar Premium members have exclusive access to in-depth Morningstar equity reports.
Exchanges
Public companies are traded on exchanges around the world. In the UK, public companies are traded on the London Stock Exchange. In the US, major public companies are traded on the New York Stock Exchange and the NASDAQ.
The FTSE 100 is an index that tracks the 100 largest companies that are traded on the London Stock Exchange. These are all considered to be large-cap companies because they have large market capitalisations. As the name would imply, the FTSE 350 index tracks the largest 350 companies that are traded on the London Stock Exchange. This includes the companies on the FTSE 100.
The original version of this educational article was published in September 2012. It is regularly updated.
