Equities(Stocks)

Most Popular Investment for Long-Term Focus

Majority (75 percent) of U.S. individual investors are currently investing in domestic equities and 60percent in international equities. The figures are revealed on July 29, 2008 by Schroders, a global asset manager, on its semi-annual survey of U.S. individual investors. The survey also revealed that individual investors are continuing to build their portfolios and maintaining a long-term outlook with an investment time horizon of more than five years.

Stock is an instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation's assets and profits. Ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding. Most stock also provides voting rights, which give shareholders a proportional vote in certain corporate decisions. Only a certain type of company called a corporation has stock; other types of companies such as sole proprietorships and limited partnerships do not issue stock.

Equities are generally riskier (higher variance of returns) than money market securities and bonds, but they provide higher rates of return over a long time period. Due to their risk and return profile, equities are categorized as a separate asset class commonly used in building investment portfolio mix. A number of types of equities include domestic stocks, developed market equities, emerging market equities, and Real Estate Investment Trusts.

Domestic Equities
Domestic equities are common stock held in publicly traded companies which operate primarily in the country where the investor resides. Owning the equity grants the holder the rights to any dividends or other distributions that the company makes. Equities are more risky than bonds since the bond holders have first call on the company’s assets if a bankruptcy and liquidation occurs. The equity holders can be left with nothing if a company liquidates.

Most people will subdivide the domestic equities market into more asset classes based on the size of the company (generally represented by the market capitalization) and the value/growth split. Value stocks are stocks that appear under-valued using some ratio such as price/earnings or book value to market cap. Growth stocks are companies with a higher than average rate of growth in their revenue, earnings or distributions. Thus, several combinations of size and value/growth behavior exist. There are several exchanges where these stocks trade and many indices which track the performance of equities in each particular asset class.

Developed Market Equities
These include equities of companies which operate in developed countries outside the investor’s home country; for the U.S. investor, they are primarily in Europe and several of the countries in the Pacific Rim. The economies of these countries are generally less volatile than developing countries. There are several indices for the developed markets. Morgan Stanley has one called the MSCI EAFE index.

Emerging Market Equities
This class includes stock in companies based in developing countries like Brazil, China and India. The economies of these countries can be very volatile and they generally don’t have as many investor protections through auditing and securities law as exist in developed markets.

REITs
REITs stand for Real Estate Investment Trusts. These are funds that make investments in real estate (both commercial and residential). They will generally generate higher levels of dividends since their investments will typically be paying them income from rents and leases. Since the distributions are higher, REITs behave somewhat like a hybrid between a traditional equity and a fixed income instrument. They will generally have higher expected returns and higher variance than most fixed income instruments.