Investing in equities What are equities?

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Equities are seen as a risky asset class, but can produce impressive returns

One of the oldest and most traditional ways to invest is to buy shares in a company. And as a shareholder, you have an equity stake in a business, which is why shares are also known as equities.  

Historically, equities have outperformed safer investments like bank accounts and bonds and can act as the real driver for growth in your investment portfolio.

However, investment in shares exposes you to the potential to lose some, or all, of your money. Shares are seen as the riskiest asset class, so you should take extreme care when you consider investing in equities and the different types available.

Find out more: Different types of investment - the Which? guide to your options 

The benefits of shares

Shares are issued by companies as a means of raising money. Essentially, companies are selling part of their business to investors, and shares offer people outside the company the opportunity to receive profits if the company is successful.

As you have become a part-owner of the company, you have certain voting rights and are sometimes eligible for certain perks beyond the receipt of profits, such as discounts on products and services. But generally, you have very little say in how the company is run.

Different types of shares

There are two types of company shares you can purchase:

Ordinary shares

Purchasing ordinary shares makes you a part-owner of the company and entitles you to dividends. These are effectively a share of the companies' profits that are paid out to shareholders once it has met all of its other obligations. Companies aren't obliged to pay dividends, however, and even if they do, they can cut them at any time. 

Most ordinary shares are voting shares, meaning you also get a say on matters relating to the company, such as director’s salaries or whether to agree to a takeover.

Preference shares

These shares carry no voting rights but, as the name suggests, entitle you to other rights. Preference shareholders usually get a share of the profits before ordinary shareholders, usually as a limited amount defined by the issuing company.

In addition to this, preference shareholders – although near the end of the line for any pay out – do get any money paid out before the ordinary shareholders if the company goes bust. Preference shares are generally seen as less risky and therefore, payouts are generally lower than ordinary shares.

How to buy shares

You can buy shares directly through a stockbroker or fund supermarket registered with the Financial Conduct Authority. You can also invest in equity funds using a fund supermarket. 

Find out more: Fund supermarkets reviewed - read our unique reviews of leading brokers

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Last updated:

February 2016

Updated by:

Michael Trudeau

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