Equities

A share (or stock) is a small piece of ownership in a company. As a shareholder you participate in its profits — through dividends and through a rising share price as the company grows.

Where the return comes from

• Earnings growth — companies that sell more and earn more become worth more.
• Dividends and buybacks — profits paid out to owners or used to buy back shares.
• Valuation changes — what investors are willing to pay for each dollar of profit. Over short periods this dominates; over decades, earnings do.

The risks

Stocks have been the best-performing major asset class over the long run, but with deep and sometimes long drawdowns: the S&P 500 roughly halved in 2000–2002 and again in 2008–2009, and single stocks can lose 80% or more. Concentration in one company, sector or country adds risk without adding expected return.

How to invest

For most people, broad index ETFs are the simplest route: one fund holds hundreds or thousands of companies at a very low cost. Sector and country ETFs or individual stocks can complement a core holding, but they need more research and more risk control.

Role in a portfolio

Stocks are the growth engine. The share you hold should match how much of a drawdown you can live through — and a rules-based exit, such as a trend filter, can help limit the worst periods.

By Dr. Harry Hamann