This fact sheet provides additional information to help with understanding the investment, tax and other financial planning concepts that we have discussed with you or included in your Statement of Advice.
Please contact your adviser if there is any aspect on which you need further information or clarification.
What are equities?
The term ‘equity’ refers to the residual value of a company after deducting all liabilities from the company’s assets.
Equities are any security that claims participation in the ownership of a company, with the most common being the ‘ordinary share’.
The equity investor in a company, known as a shareholder, participates in the economic success of a company, receiving income in the form of company dividends paid from net profits after tax, and potentially capital growth in the value of the shares.
A dividend is the distribution of a part of the company’s income to its shareholders. The board of directors decides on an actual payment and the amount after deciding about other necessities (e.g. investments, reserves). Dividends can take the form of cash payments or additional shares.
The intrinsic value of a share is therefore determined by the performance (and performance expectation) of the company and by extension, its competitors and the broader market environment, e.g. economic conditions.
A shareholder will typically have a right to vote, in proportion to their shareholding, at general and extraordinary meetings of the company. They do not have access to internal information, e.g. current financial situation, strategic decisions unless they are also a director or employee or the company.
Key Features of Equities
Investment in Equities may be suitable for investors with a time horizon greater than five years, who are primarily seeking capital gains, with some income.
When contemplating an investment in Equities, investors should consider the following key features in light of their investment needs.
Investment Horizon
Medium – Long Term
Return Expectation
Predominantly Capital Gain, with the potential for Dividend Income.
Market Expectation
Suitable for expectations of rising markets. There are trading strategies that cater to other market expectations, e.g. short selling, which has a riskier return profile.
Maximum Gain
The maximum gain is unlimited, comprised of capital gains and income.
Maximum Loss
In the case of fully paid ordinary shares, the maximum possible loss is that of the capital invested with an insolvent company or companies.
Profit / Loss
Equities are typically perpetual investments with no set maturity date, and returns are dependent on multiple variables, making them more volatile than other investments.
Trading Process
When placing an order, the price at the exact time of execution is unknown, as there is a time delay between the placement and execution of an order.
To manage this, investors may provide other instructions when placing orders, such as requesting specific place or time of execution, a limit to the buy/sell price (known as a limit order) or execution at the best available price for the transaction size (known as a market order).
Trading Costs
Buying and selling equities create explicit and implicit costs for the investor. Brokers and banks charge transaction fees for their services depending on the type of asset, the market place and transaction volume. Minimum fees per transactions can apply. The exchange may also charge a commission, and in some countries, governments add stamp duties or other taxes to the total cost.
Investors should also be mindful of implicit costs, mainly bid/offer spreads, on both the traded equity and any associated currency conversions. The bid/offer spread is the gap between the highest price a buyer is willing to buy a security and the lowest price that a seller is willing to sell that same security. A spread is wide (large) or narrow (small) and is a reflection of liquidity in the market for a particular security.
Advantages and Disadvantages
Advantages
- Cost-effective to trade and hold
- Obtain direct participation in the financial performance of a company
- Possibility of both income and capital growth
- Historic long-term outperformance when compared with the other main asset classes
Disadvantages
- Volatility, with fluctuations in capital value and income much higher than other key asset classes
- Shareholders rank behind other creditors in a liquidation
Risks
When considering equity investment, investors evaluate two main risk factors: the economic environment (market risk) and the company itself (company risk).
Market Risk
The investor is exposed to the general economic environment, e.g. interest rate changes, exchange rates (when not denominated in home currency). The psychology of the market participants tends to enforce trends, and in a market of expectations, not all expectations may be rational.
Company Risk
Company risk stems from the economic situation or environment specific to the company, including the quality of the company, its management and its competitors.
Company risk is an unsystematic risk, meaning that an investor can reduce its impact on a portfolio basis by including exposure to other companies, sectors and countries in your portfolio.
Important Information
Walbrook Wealth Management is a trading name of Barbacane Advisors Pty Ltd (ABN 32 626 694 139; AFSL No. 512465). Barbacane Advisors Pty Ltd is authorised to provide financial services and advice. This post is general information only and is not intended to provide you with financial advice as it does not consider your investment objectives, financial situation or needs. You should consider whether the information is suitable for your circumstances and where uncertain, seek further professional advice. We have based this communication on information from sources believed to be reliable at the time of its preparation. Despite our best efforts, no guarantee can be given that all information is accurate, reliable and complete. Any opinions expressed in this email are subject to change without notice, and we are not under any obligation to notify you with changes or updates to these opinions. To the extent permitted by law, we accept no liability for any loss or damage as a result of any reliance on this information.
