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Introduction

A lot of people buy stocks for short-term speculation, or simply to receive dividends. But is the business of equity investment that simple? What are the factors behind share price movements? In fact, it is very important to know how to manage risks before building an equity investment portfolio.

Investing 101: How to value a stock?

An introduction to indicators that are helpful in analysing the value of stocks.

What are equities?

Become a company’s shareholder through stock investment. If that company makes money, its investors may receive both the dividends it distributes and capital gains due to the rise in its share prices.

What does buying equities mean? To become a shareholder!

A company can raise funds through issuing bonds or selling shares. Generally, the former needs to pay interests regularly and repay the capital upon maturity. The latter, on the contrary, is not subject to such restrictions. Equities are the rights to own a company. Investors who are positive about a company’s future can buy its shares and become its shareholders in order to enjoy its profits.

If that company makes money, its investors may receive both the dividends it distributes and capital gains due to the rise in its share prices. Of course, a company can choose to reserve the cash for future development and hold off on dividend payout. Investors might also incur losses due to share prices fall.

How are shares priced?

Stock prices are swung by a cocktail of factors, such as economic factors, financial events, interest rate movements, corporate profitability, market sentiment, merger and acquisition, government policies and company news.

What you need to know about share price movements

We all know share prices can go up or down. But what is affecting their performances? There are two main factors. First, fundamentals, meaning the company’s operational efficiency, financial well-being as well as public expectation on its future development. Second, macro-economic and market conditions, which are determined by interest rates movement, central banks’ monetary policies and market sentiments.

Why investing in equities?

Long-term investment fears no short-term volatilities. Historically there are many financial events and economic crises (such as the dot-com bubble burst in 2000 and the global financial crisis in 2008) that lead to stock market crashes. Yet more often than not stock prices recover the lost ground and rise steadily.

Potential capital gains and dividends

Although putting cash into bank deposits entails relatively low risks, the potential return is equally low. Worse, the capital might be eroded by inflation. As mentioned, investing in equities unlocks return potentially from share prices growth and dividend payouts. Based on historical data, the return on equities tends to outperform cash or bonds in the long run.

The financial market is unpredictable. Equity likewise sees price fluctuates. Historically there are many financial events and economic crises that lead to stock market crashes. Yet more often than not stock prices recover the lost ground and rise steadily. Investors might miss long-term opportunities if exiting the market for short-term factors. Therefore, the key to equity investments is to start early and adhere to one’s investment strategy.

Diversification

Control risks through diversification, invest across different regions and sectors.

There are multifarious types of equities, manage risks through diversification

Equity performances can be very volatile. Different types of equities behave differently under different conditions. Investors can therefore diversify risks through asset allocation.

Equities can be categorised by geography, sector, market capitalisation and investment strategy. By geography, emerging market stocks tend to have greater potential for growth versus developed market stocks, yet their volatilities and risks are also relatively higher. By sector, there are defensive and cyclical stocks. If a portfolio holds stocks from different geographies and sectors, risks can be spread across different assets.

Equity funds generally hold a basket of stocks. Investors can pick among different equity funds based on his or her risk tolerance in order to reach one’s long-term investment goals.

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Risk Warning

This page is prepared for general information purposes only and does not have any regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive it. This page does not constitute an offering document and should not be construed as a recommendation, an offer to sell or the solicitation of an offer to purchase or subscribe to any investment. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management (Hong Kong) Limited (“AMHK”) accepts no liability for any failure to meet such forecast, projection or target. AMHK has based on information obtained from sources it reasonably believes to be reliable. However, AMHK does not warrant, guarantee or represent, expressly or by implication, the accuracy, validity or completeness of such information.