Public Equities

UNDERSTAND THE ESSENTIALS FOR INVESTMENT

What are public equities?

In a nutshell, stocks are basically an equity investment that represent ownership in a company. This entitles the holder of a company’s equity to part of its earnings and assets. Public equity is a stock that is bought and sold through a public market such as the New York Stock Exchange or the London Stock Exchange.

There are different types of stock – with companies often offering the investor the right to buy either ‘common’ or ‘preferred’ stock. What is the difference?

Common Stock

Gives shareholders voting rights but no guarantee of dividend payments. As the name suggests, this is the most common type of stock issued by companies. Most people who invest in public equities buy common stock.

Preferred Stock

Provides no voting rights but usually guarantees a dividend payment. A dividend is a distribution of a portion of the company’s earnings. Dividends are decided and allocated by the company’s board of directors, usually requiring shareholders’ approval. They can be paid monthly, quarterly, biannually or yearly.

Why do investors like public equities?

There are various reasons why investors like to invest in the public equity market:

  • Investment Gains: One of the primary benefits of investing in public equity is the opportunity to potentially grow your money, to reap investment gains. Over time, the stock market tends to rise in value, though the prices of individual stocks will rise and fall daily. The average annual return for the S&P 500 since its inception in 1928 through 2017 is approximately 10%.
  • Dividend Income: Some stocks may provide income in the form of a dividend. These are additional payments made by the company, regardless of whether the stock has lost value on the market. Dividends represent an income to the investor that is on top of any gains from eventually selling the stock.
  • Liquidity: Compared with many other asset classes, public equities are a relatively liquid asset. If trading on the main stock markets, the investor can usually buy and sell stock within seconds.

 

What are the main risks with a public equity investment?

Investing in public equities through the stock market is a risky business. However, if you know the risks, you are better placed to mitigate them.

  • Market risk (or systematic risk): This is the risk of financial loss due to factors that affect an entire market or asset class. For example, economic recession or a stock market collapse. The most recent market collapse ran from 2007 to 2009, when the S&P 500 lost approximately 50% of its value within 17 months.
  • Business risk (or unsystematic risk): This risk relates to financial loss associated with specific companies. For example, the stock value of a company may fall if it reports lower than expected earnings. A recent example is Volkswagen during the diesel emission scandal in 2015. After the news broke, the stock lost more than 30% – virtually overnight.
  • Liquidity risk: While the stock markets are generally perceived as relatively liquid markets, liquidity can vary widely for individual companies and markets. Usually smaller stock exchanges and lesser known companies can be more difficult to sell and the negative price impact can be substantial.

What is the difference between a growth stock and a value stock?

Growth stock: As the name implies, these are companies that have substantial potential for growth (either by revenues, cash flows, and definitely by profits) in the foreseeable future. Their main focus is to grow and, in order to achieve this, the company must devote current revenue toward further expansion. These types of stocks don’t often deliver dividends. Often growth stocks are younger companies with innovative products, but can also be established companies with continuous high demand for their products. Growth stocks can provide substantial returns on capital, but often viewed as more risky and volatile.

Value stock: These types of stocks are about finding diamonds in the rough – companies whose stock price doesn’t  fully reflect their fundamental worth. But bear in mind, the definition of what is good value is subjective and it takes a lot of time, experience and knowledge to identify undervalued companies. Value stocks are usually larger, more established companies that pay dividends and are therefore may be considered less risky than growth stocks.

How do I get into listed stocks?

Here we are list some of the most common ways to invest in the stock market.

  • Single stocks: It is fairly easy to invest in single stocks and it doesn’t take a fortune to get a well-diversified portfolio. However, it takes a lot of time and knowledge to find the right companies to invest in. Remember, it’s not enough to find a business you believe in, you have to get in at the right price. If everyone already thinks it’s a great business it’s probably already in the right price range and there might not be much upside left.
  • Mutual equity fund: If you feel you don’t have the time and knowledge to invest in single stocks you can chose to invest in a managed fund where a fund manager will do the job for you. With so many managed funds out there how do you find the right one? This is a good discussion to have with your financial advisor.
  • Equity ETFs: Today there is a wide selection of equity ETFs. From ETFs with global equity market exposure, down to very specific themes, it’s all there! Read more on ETFs here.

 

PUBLIC EQUITIES FOR RESPONSIBLE INVESTORS?

Investing in equities presents exciting opportunities for the responsible investor. What’s more, the evidence is stacking up that investing in sustainable equities can improve financial returns. For example, check out this fantastic study by Arabesque and Oxford University, “From the stockholder to the stakeholder”.

So how do you get started? There is a wide range of equity products available and if you want to invest in single stocks there are now tools to help you assess how well companies perform on the ESG (Environmental, Social and Governance) scale. For example, take a look at S-Ray from Arabesque – where you can search for a specific company to see their ESG score. Or take a look at Corporate Knights 100 , listing the 100 companies with the highest ESG scores. It must be noted though, for the most part these freely available tools will only give you the score or the listing and not much additional information on why a company is receiving that specific score. For additional information you have to buy subscriptions which can be expensive.

As another option, the responsible investor may look to invest in a fund or ETF with a clearly defined and stated sustainability strategy. The first step is to define what you are looking for – for example, do you want to focus on a specific theme like gender equality or just generally invest in sustainable companies? As always, once you are clear on your goals and priorities, it is recommended you speak with your financial advisor or other expert about potential risks and available options.

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