Equities are suitable as part of a diversified portfolio, in which the investment is distributed over a number of assets, minimising the investment's risk. Investing in equities requires you to keep track of the companies that have issued the equities, as well as of the general market conditions.
If you want to trade in shares, you must be willing to follow up companies and the market, as strong fluctuation in prices is typical of shares. Share prices are typically volatile. This is why shares often have higher expected returns than fixed-income investments. But the higher return also comes with a higher risk. The best way to reduce the overall risks is to diversify your investment.
If you invest in shares, the first thing you'll have to do is choose which company’s shares you want to buy.
As a shareholder, you can also affect the business by taking part in the company’s Annual General Meetings. When picking the shares in which to invest, you should carefully consider your investment options.
Examples of potential investment criteria include strong dividend payment history, good plans and growth potential, strong management, the impact of megatrends on the business, and the company’s key figures. But there are also many other factors that may come into play when picking which shares to buy. It’s often good for an investor to take an interest in the company and the market they want to invest in.
Share prices are typically volatile. This is why shares often have higher expected returns than fixed-income investments. But the higher return also comes with a higher risk. The best way to reduce the overall risks is to diversify your investment.
There are many different ways you can add diversification to your portfolio, such as sector diversification, geographical diversification and time diversification. You can also lower the risks by investing in other asset classes, including fixed-income investments, funds or other investment products.
You can invest in equities
In addition, you can invest in equities by subscribing for shares in share issues or share sales where the present owners of the company sell part of their holdings to new investors.
The shares are in the form of book-entries and you will need a book-entry account for them. The book-entry account will be opened in the bank. After your trades have been completed you will receive a calculation to help you to settle capital gains or losses in taxation.
In order to be able to trade, you will need one of Netbank´s three trading services, in addition to the book-entry account. With the service you can submit buy and sell orders and monitor their status and the value of your investments.
The return on an equity investment is dependent on the long-term success of the issuing company. On the long term, it is likely that an equity investment will generate a better return than a fixed-income investment, despite share prices sometimes rising and falling drastically.
The risks in equity investment are related to the general performance of the equity markets and the success of the issuing companies. Investments in foreign shares also constitute an exchange rate risk. Equity investors will gain a return from the dividends paid on the shares and from a rise in the shares' prices.
You can minimise risks by diversifying. You can reduce the company risk by spreading your investment over several companies and the market risk by investing some of your assets in fixed-income instruments. Funds are an excellent help in diversification. In addition, it is worth remembering time diversification. It means that shares should be bought and sold in several lots over a long period of time.
The return on equity investments is based on the potential rise in the share price and on dividends.
Many people invest in equities primarily due to expectations of a rise in share prices. However, share prices may also go down, in which case the return for the investor may be negative. If the investor decides to sell the shares at this point, they may incur an investment loss and lose some or all of the capital invested.
Share prices tend to fluctuate more than the prices of bonds, and therefore equity investments are riskier. On the other hand, equities can be expected to deliver a higher return in the long term.
Dividends are profit sharing payments, paid out by companies (usually limited liability companies) to their shareholders. Most companies in Finland pay dividends once a year.
Decisions on whether to pay out dividends are made by the annual general meeting of shareholders, which also decides on the dividend amount. Equally, the annual general meeting may decide that no dividend will be paid in cases where the company has, for example, recorded a loss or needs capital for investments. This is the reason growth companies tend to pay smaller or no dividends.
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