What are Stocks?
Stocks, also known as shares or equities, are the units of investment in individual companies. A stock represents ownership of a company, as well as a claim on the company’s assets and earnings. A shareholder of a public company can enjoy dividends from the company’s profits, participates in its share price performance, and has the right to vote at its shareholder meetings.
Stocks may be bought or sold, usually but not always, in the context of a securities exchange, and the exchange lists companies across different industrial sectors.
What are the risks to consider?
Price Risk
Prices can fall below purchase price due to economic or company-specific factors.Portfolio diversification, or spreading your investment across different securities and industries, as well as across different investment products such as funds and bonds, can help reduce investment risk and achieve more stable returns in the long term."
Volatility Risk
This refers to the risk when the value of a security fluctuates significantly over time. The volatility could be due to news related to the security itself, or to the broader market that affects many securities. Shorter-term price fluctuations may not be reflective of the longer-term fundamentals of the security.
Liquidity Risk
This is characterised by an unusually high bid-ask spread. This happens when there is a significant difference between the buying price and the selling price of the stock, and buyers and sellers cannot therefore be matched in the market.
Currency Risk
Investing in foreign securities enables you to diversify in different stocks across the world for your long-term portfolio, but bear in mind the risk associated with fluctuations in exchange rates.
Why should you incorporate stocks into your portfolio?
Capital Growth
Shares can increase in value over time. When one buys shares in a company, its revenue and profits may grow over time. The resulting increase in share prices is capital growth.
Dividend Yield
Some shares can give investors some income in the form of dividend. A dividend is a distribution of a portion of a company’s earnings or reserves to its shareholders. Some companies tend to pay dividends regularly (quarterly, semi-annually or annually), while others pay dividends sometimes or not at all.
Highest Historical Returns
Stocks have historically offered investors the highest returns.
Liquidity
Investors can buy and sell shares quickly and easily when we want. Stocks are relatively liquid assets. Investors who look at thinly-traded stocks (low volume) need to be aware of the heightened volatility involved.
Transparency
We can see the price of the shares we want to buy or sell. Investors enjoy transparency of prices transacted on the exchange and are able to buy/sell shares quickly in flexible amounts (minimum 100 shares per transaction).
Comparisons between ETFs, Unit Trusts and Stocks
| Stocks | ETFs | Unit Trusts | |
| Listing Status | Yes | Yes | No |
| Trading | Priced and traded continuously throughout the day | Priced and traded continuously throughout the day | Based on forward pricing so one pricing a day, usually available 2 working days later |
| Volatility | Higher as certain events can trigger major share price swings | Lower as diversification from a basket of stocks cushion the volatility from an individual price swing | |
| Management of Investment | Active management by investor to track individual stock's developments and performance | Passive management as ETFs seek to replicate the performance of its underlying index | Actively managed by dedicated fund manager who seeks to outperform its benchmark index |
| Costs / Expense Ratio | Brokerage charges | Brokerage charges | Expense ratios usually below 2% |
| Liquidity | Yes, but varies according to the individual stock | Yes, but varies according to the individual ETF | Not a concern as fund manager will create or redeem units |
| Diversification Benefits | No | Yes | |
| Counterparty Risk | No |
Cash ETFs: No Synthetic ETFs: Yes Synthetic ETFs - Yes |
No |