Beyond The Break

This note is directed at anyone who doesn’t really know what equity or shares are. This is our attempt to explain it in very simple terms.

Equity is ownership. Every company in the world has owners. Some companies are owned by governments (SOEs), some are privately owned (like our own business), and some are publicly owned.

Publicly owned companies are listed on stock exchanges like the Johannesburg Stock Exchange (JSE), the New York Stock Exchange (NYSE), or the Nasdaq and their ownership is divided into little units called shares or equity. When you buy a share, you become one of the many owners of that company. It doesn’t matter whether you own one share or one million, you’re still an owner.

As an owner, you’re entitled to receive dividends (if they company pays dividends), vote on important company decisions (like electing directors or approving transactions). You may also benefit if the company you own grows and becomes more profitable (and therefore more valuable) over time.

Apple, for example, is one of the most recognisable public companies on the planet and it currently has over 14 billion shares in existence. If you buy even one Apple share, you literally own part of Apple.

The price of a share is the amount that other people in the market are willing to buy or sell it for at that moment. Prices change all the time because there are many investors who are constantly changing their views on what the company is worth, the company itself becomes more or less successful, global events cause changes in sentiment, or new information becomes available (public companies are also required to release regular financial statements and updates, which can quickly change how investors value them).

Collectively, when people believe the future looks good for a company, they’re usually willing to pay more for its shares which generally pushes prices up. Conversley, if they’re worried, they may sell, pushing prices down. Short term movements (up and down) are common and normal (we largely ignore these short term movements and focus instead on the long term outlook).

Importantly, there is no guarantee that share prices rise. Some companies go out of business, some fail to adapt with the world, some get overtaken by competition. When this happens, share prices can collapse or remain unchanged for years. Equity investing involves risk, but that risk is part of the reason equities can outperform other assets over time.

If you buy the right companies (strong, profitable businesses with bright futures) you might be able to sell your shares one day for more than you paid. This could be because you bought them when they were undervalued, the company grew or expanded, or the market recognised the company’s long-term potential.

Of course, timing plays a major role in equity investing, and the most successful investors have both time and patience. This is exactly the approach we take when building and managing portfolios for our clients. We are not taking high risk bets or searching for short term gains.

We prefer high-quality businesses with solid financials and strong long-term prospects and we prefer owning many of them in a diversified portfolio. You can have your own diversified equity portfolio in your own name too. You don’t need to be wealthy or know anything about finance to begin. Simply reach out to us.