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What are Equities?

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What are Equities?

Carrying on from our ‘eggs in one basket’ message last week, we’re going to break the shell a bit (see what we did there?) and go deeper into what the different ‘eggs’ in the ‘basket’ mean.

This week, we’re starting with equities. They’re often called some other names, such as:

 

What is the history of equities?

Back in the 17th century, the Dutch East India Company (VOC) became the first company to issue shares to the general public. This is commonly referred to as the birthplace of capitalism.

They would use the money raised from issuing these shares to go off and explore the world, trade and make profit.

 

Once they returned to Amsterdam, they would distribute the profits to those who bought shares.

It didn’t take long for this to catch-on with other countries. Pretty much every developed country in the world now has a stock market, where the biggest companies issue shares to the general public.

 

What are equities?

An equity is a share in the ownership of a company. This means that if you hold a share, you own a very small piece of a company. Cool, right?

If the value of the company goes up, your shares are worth more and you have the potential for some return in the share of the profits (also known as dividends). If the company is doing badly, it’s unlikely you will get dividends and the value of your shares will go down.

This is what makes them so ‘volatile’ (or unpredictable, in normal language).

 

Why are they important?

Investment in equities is part of everyday life.  Even if you don’t think that you have shares in any companies, it’s more than likely that you do.

Equities are important to companies as they provide them with funding. That means they can do the things they want to in order to make more profits for them. Once they make that profit, they reward you for your loyalty by paying you a dividend.

Profits come in, Dividends come out and value of shares go up

They’re important to you as they are vital to getting growth on your money. Alongside getting dividends, you want the value of your shares to go up over time. Then, when you sell your shares, you make a profit on how much you paid for them.

 

What is the future of equities?

This is being written during the COVID-19 crisis, which has affected the value of equities hard, as companies have been forced to temporarily close. In fact, just today, Shell have announced that they aren’t paying a dividend to their shareholders for the first time since WW2.

We are hoping that history may give us some clues as to what may happen after this global crisis calms down. The stock market has always recovered eventually (read this article from Morningstar for more on this) and people who have put their trust in equities have benefitted from this trust.

However, there are likely to be a lot of people who are more wary of equities as they have seen the value of their shares plummet.

 

Where can I find out more information?

The website Money Saving Expert is a great website, filled with tools to help you out with this. They are also completely unbiased so you know the information is true and relevant.

And, of course, we’re always here for a nerdy chat about this kind of stuff 🙂