What are equities and how do I invest in them?

The stock market is one of the most vital areas of a market economy, as it gives companies access to capital. It also gives investors part ownership in the company, which offers the potential for gains and dividends based on the company's future performance.

What are shares and stock?

A share of stock is the smallest unit of ownership in a company. If you own a share of a company's stock, you are effectively a part owner of the company (a shareholder).

This entitles you to dividends - a share of the company's profits, which is paid out to you periodically.

You're also entitled to attend the company's annual general meeting and to vote on matters relating to the company. The more company stock you own, the greater your power when voting.

How do investors know which stocks to buy?

Company stocks are typically highly liquid and trade daily. This creates opportunities to buy or sell shares almost any day that the markets are open.

Some of the largest buyers and sellers of company stock are portfolio managers, who manage collective investment schemes and other funds on behalf of investors like you. Portfolio managers research a vast range of companies across many sectors to determine which companies will grow in value and, in doing so, make their stocks more valuable.

Three different types of equities

There are different types of stocks based on different companies listed on the stock exchange. They are frequently classified according to market capitalisation (or market cap), which determines a company's size in a given market. A company's market cap is calculated by multiplying its unsold stock by its current market stock price.

1. Large cap stocks

These are stocks of established companies that fall within the top 40 largest companies listed on the FTSE/JSE All Share Index.

2. Mid cap stocks

These are stocks of medium-sized companies - those that fall just behind large cap stocks on the FTSE/JSE All Share Index.

3. Small cap stocks

These are stocks of companies with a market cap under R5 billion and listed on the FTSE/JSE All Share Index. Small cap stocks are not traded as often as mid and large cap stocks, so the information available for investors on these companies can be relatively limited. Some unit trust funds focus specifically on small cap stocks as a source of high growth and high returns in investment portfolios.

What are equity funds?

An equity fund is a collective investment scheme that invests primarily in stocks. Equity funds can be passively or actively or managed. But what's the difference?

In passive investing, the fund manager follows the trends of the market, without using their own discretion. In a way, it's like investing on autopilot.

In active investing, the fund manager makes decisions about when to buy and sell shares. A fund or portfolio manager who actively manages equity funds usually chooses a focus for the fund, for example:

• Growth funds: These funds invest for maximum capital appreciation by buying stock in growth companies. Growth companies are those whose earnings are on an upward trend or whose earnings are anticipated to be on an upward trend.
• Value funds: These funds invest in shares that have an anticipated higher earning potential than their current stock valuation. Value funds aim for medium- to long-term capital appreciation and frequently offer a higher-than-average level of income.
• General funds: General equity funds invest in selected shares across all industry sectors of the FTSE/JSE All Share Index, as well as across the range of large, mid, and smaller cap shares. General funds don't subscribe to a particular theme or investment style and could consist of both value and growth shares.
• Mining and resources funds: These funds invest in shares of companies involved in the exploration, mining, distribution and processing of metals, minerals, energy, chemicals, forestry, or other commodities.
• Financial and industrial funds: These funds invest in banks and other companies that operate in financial services and the industrial sector. Some funds have a more concentrated approach and invest only the finance sector, or in the industrial sector.

How do I get started?

If you'd like to build your capital by investing in equities, speak to a financial adviser today. You can also learn more about other asset classes like property, bonds, and cash.