Equities generally out-perform other asset classes
forming an important part of many investment portfolios.
What are equities, shares and stocks?
Equities, shares and stocks is essentially the same thing. Investors can own stock in a company or buy shares in a stock. Either way the term represents ownership in a company. Equity owners participate in a share price as it increases/decreases and may be entitled to a portion of the company earnings via dividends and franking credits.
Why invest in equities?
Generally equities over the longer term will out-perform other asset classes including fixed interest, bonds and property. The trade-off is that equities are generally more volatile than other asset classes, however form an important part of an investor’s portfolio when strategically weighted across a multi-asset portfolio. The strategic weighting depends on various factors including risk tolerance and investment objectives.
Investors are attracted to shares for the opportunity to earn income by the way of dividends and capital gains. The market has shares for many risk appetites including blue chips which have long term, predictable earnings histories to speculative shares which have the opportunity to increase/decrease in price significantly in short periods of time.
Some shares are classified as growth stocks, where the share price can experience long periods of strong upside momentum as earnings or earnings forecasts rapidly increase. Other stocks can be classified as income stocks, which have predictable earnings and generally pay a larger dividend and franking credits than other stocks to shareholders.
Trading equities frequently produces detailed reports on income stocks as well as other income investments including bonds and hybrids. Please contact us for more information.
What drives a company share price?
Generally the most influential factor responsible for driving a company share price is the underlying fundamentals and company earnings. Other factors including market sentiment, speculation and thematics which can also influence a share price. The impacts of sentiment and speculation can also be short lived.
ASX listed shares will report earnings quarterly providing a valuable insight into the company’s financial health, which also provides investors with the information to determine whether the stock is trading at attractive levels compared to its peers.
A company’s share price will generally be supported when the company has a track record of reporting increasing earnings.
Companies with a volatile earnings history will also most likely have a volatile share price. The volatility is a reflection of investors’ expectations on earnings as the market speculates on particular outcomes.
Consensus stock forecasts and analyst research
Investment research houses, brokers and independent advisory firms will often produce in-depth and detailed analyst research on major stocks listed on the Australian Stock Exchange. Some boutique investment houses will also release research on small and mid-cap ASX listed companies.
For stocks that have wide coverage, the consensus forecasts can influence an investor’s view on the stock potentially influencing the share prices. Stocks which are widely covered with fairly close consensus targets can be less volatile than another stock which may not be covered by many analysts or one where major analysts have conflicting views.
Analyst’s research is not always accurate as the reports are generally educated forecasts drawing on the available information at that time. If a company reports, and the news varies significantly from the consensus the share price could gap in price as result as the market re-digests the new information.
Trading equities also produces multiple reports covering small, mid and large cap ASX listed companies. We provide clear buy, sell and hold ratings. For more information on these reports click here.
Every investor will have their own risk appetite and investment objectives. It is recommended that investors consult a licenced investment adviser before making any decisions regarding any buy/sell or hold recommendations.
Investing in equities vs ETFs and LICs
Investors have a choice of directly investing in equities or buying exposure to the asset class via alternative instruments or securities including (and not limited to) ETFs and LICs. Both have positives and disadvantages, in fact a whole research note could be written on the subject.
An investor who doesn’t have the experience, or the drive to read and understand research reports and follow the markets might consider ETFs or LICs. Professional investors may choose to invest directly in equities, however the statistics suggest that spreading risk across asset classes will reduce volatility and make it easier to target the required rate of return.
ETFs will generally aim to track a particular index, providing a cheap and efficient way of building a portfolio with the required asset allocation. LICs or listed investment companies are managed by professional portfolio managers who are responsible for investing the vehicles funds. LICs will generally have exposure to a particular asset class, run a specific strategy or methodology and the objective is usually to out-perform a relevant bench mark.
Some investors will build portfolios with a mixture of direct equities, LICs and ETFs with weightings spread according to their risk profile and investment objectives.
How to decide when to buy and sell shares
Investors and traders employ a wide range of methodologies and strategies when deciding when to buy and sell shares. The most common for investors is either Fundamental Analysis or Technical Analysis. Or, a combination of both.
Fundamental analysis takes into consideration a company’s financial health, management and can also include further analysis of Macro environments. Analysing a stocks financial health may include analysis of current financials including the PE Ratio, Dividend Yield and opportunity for future growth or the EPS (earnings per share) growth. Fundamental investors may also compare a company’s financials to that of its peers when making investment decisions.
Technical analysis generally refers to the interpretation and prediction of share price movements using charts and various indicators. Many popular indicators include moving averages, Bollinger bands and volume indicators.
Investors and traders may also preform both qualitative and quantitative screens when looking for stocks to buy. Often these scans will result in filtering out more potential losers than winners, which opens opportunities for other strategies including short selling.
Investment firms and independent research houses also produce share research which they provide to clients giving clear and concise analysis of stocks listed on the ASX. For a list of shares we cover, please contact us below.
Trading equities provides clients with detailed research covering not only the individual stocks, but also the markets and sectors helping to filter out the stocks most likely to perform under current conditions. Below is a slide from one of our research reports.
What is asset allocation?
Asset allocation is the strategic allocation or weighting of investments across individual assets or multiple asset classes. A methodology which employs an asset allocation strategy provides diversification while generally spreading risk, according to an investors risk tolerance across shares, bonds and cash.
There are various ways to gain exposure to the asset classes, and each class will have sub classes. Some subclasses just for equities includes Large-Cap shares, Mid-Cap shares and Small or Micro-Cap shares. The market cap refers to the market capitalisation or the value of the company which is found by multiplying the stock price by the number of shares outstanding.
A multi asset investment allocation can improve a portfolio’s risk profile, while potentially targeting a higher rate of return. Essentially, less risk or volatility for a higher return.
Deciding when to invest?
Every asset class will have unique risk/return characteristics which makes it important for investors to consider their risk tolerances and investment objectives before making financial decisions. We are also here to help and answer your queries. To speak to a licenced investment adviser today, contact us below.
Generally investors will fall under three categories which take into account their investment horizon and risk tolerance.
Investors with a long investment horizon will generally have a higher weighting to equities and growth assets. Accumulators may benefit from compounding effects by re-investing dividends back into a diversified portfolio which can be held through multiple investment cycles. Accumulators may also benefit from making regular contributions and following an investment strategy designed in conjunction with an investment adviser. Accumulators will also benefit from investment strategies with exposure to investment vehicles with low fees, which translates into improved returns over the longer term.
Growth investors are generally mid-way through their working life, have investments in multiple asset classes and have at least one full investment cycle remaining until retirement. Growth investors should consider the importance of diversifying across multiple asset classes, which can reduce volatility and improve the predictability of portfolio performance.
Investors approaching retirement will generally be looking to reduce the overall volatility of their portfolio and possibly have a higher weighting in income producing asset classes. Volatility can be reduced by rotating from growth assets into other asset classes which have a lower risk profile giving the investor more opportunity to plan for retirement.
Why do companies list on the stock exchange?
Companies will generally list on the exchange to access funding for growth and expansion. Shareholders who participate in the float or IPO will then have equity in the company and therefore will participate in share price fluctuations, potentially have access to dividends and also some voting rights.
Popular floats can be oversubscribed, and often building relationships with connected investment professionals can help to keep investors informed with the latest floats and new listings.
ASX Market Hours
The Australian Stock Market (ASX) is open for six hours each week day, excluding some public holidays. The market goes through several phases during the day, including opening and closing auctions. The opening phase starts at 10am Sydney time and the closing phase starts at 4pm and officially matching shortly thereafter. For more information please visit the ASX website.
Chess Sponsorship (HIN) vs Security Reference Number (SRN)
Investors who purchase shares through a sponsoring broker will generally have shares chess sponsored or held under a holder identification number (HIN). Each broker will allocate the investor a unique HIN which will have all the shares purchased through that broker registered under the same HIN.
Some investors may hold shares with a 10 or 11 digit security reference number (SRN) which means the shares are registered with a share registry. Investors who purchase shares directly through a public offering or IPO will often have shares registered under an SRN. These shares can be transferred to a sponsoring broker and therefore lodged under a HIN making it easier to buy or sell that holding.
There are several share registries in Australia including Boardroom Limited, Link Market Services and Computershare. There are also many international registries. Trading equities can also facilitate the sale or purchase of international shares. Please contact us for more information.
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