An equity is a share of ownership in a company. When you invest in a company’s stock, you become a partial owner or a shareholder. The ownership provides a voting right on major company’s decisions and most importantly, a claim on a portion of a company’s profits. Companies sell shares to public to raise capital to grow their businesses. After the Initial Public Offering (IPO), the shares will be traded on the stock exchange of a country.
How Do You Make Money from Stocks?
Investing in stocks can provide capital appreciation through growth and income through dividends. Investors buy a stock at a price with the expectation that the company can grow and become more valuable and as a result, the stock price can rise. Investors are hoping that they can sell the stock later for a profit.
Some companies provide dividends. This is an activity to share the profits with shareholders. This is usually a cash payment per share, often paid quarterly. Established, profitable companies in utilities and consumer goods sectors are well known for paying regular dividends.
Investments with higher potential returns always come with higher risks. Equities are considered riskier than savings accounts or bonds, so they offer higher potential long-term returns. Stock investment is suited for long-term and you have to ride out the market’s ups and downs in order to have good returns.
Stock market is too volatile for short-term needs. If you need the money when the market is in a downturn, you will be forced to sell the stock at a loss. The key to investing in stocks is to focus on long-term investment goals and plans despite short-term noises, and avoid making any emotional decisions such as panic-selling during a market downturn.
Strong economic growth normally supports risk assets such as equities. But when accompanied by persistent inflation, policies can remain restrictive longer than what the investors expect, creating challenging environment for equities. Economic resilience can delay rate cuts, which is not favourable for equities.
What Happens to Equity Market During a Recession?
Equity market’s turning points unfold in a sequence. Valuation multiple peaks, followed by the decline in stock prices and margins, and finally earnings and revenue weaken as the recession begins.
Stock prices move in tandem with corporate earnings, while fluctuation in valuation multiple is usually driven by short-term market volatility and investors’ sentiment, not necessarily driven by the fundamentals.
Market starts to fall before the recession officially begins and tends to recover before the economic contraction ends. A recession can reshape market leadership causing shifts between cyclical and defensive sectors and it can make a long-lasting change as to which industry outperforms after the recession ends.
What Are Dividends?
Dividends are a portion of a company’s profits distributed to shareholders usually in cash. Well-established, mature companies with steady profits pay dividends regularly (quarterly, semi-annually or annually) as they have less need to reinvest all their cash back for growth. Dividend yield measures how much income a stock produces. You can calculate it by dividing the annual dividend per share by the current share price. Dividends are not guaranteed and can be cut or eliminated. High dividend yield may signal a falling stock price or an unsustainable payout that can be reduced in the future.