Key Benefits of Investing in Equities
1. Capital gains over the long-term
Historically, equities have provided some of the strongest after-tax investment returns over the long-term. By owning equity in companies with growth potential, investors have the opportunity to beneﬁt from capital gains as the asset grows in value over time. Investors enjoy unlimited participation in the earnings of the ﬁrm. Of course, investors cannot expect the company to pay out all its proﬁts in a form of a dividend as this may come at the risk of future proﬁtability and a lower share price.
2. A good source of income
The dividend yield on equities is another important source of return. Unlike term deposits, dividends from equities can have inﬂation built into earnings where companies are able to pass cost increases onto customers.
3. Highly liquid
Equities are traded on major stock markets around the world. They are highly liquid which means that they can be converted into cash quickly and with minimal impact to the price received. Unlike direct investments, there is relative ease in the transfer of ownership and the movement of equities.
4. Tax advantages
The after-tax performance of equities is lifted by dividend imputation, a tax beneﬁt not shared by other asset classes. The dividend imputation system allows investors who have been paid a dividend to take a personal tax credit (franking credit) since the company has already paid tax on the dividend.
5. Corporate control
Equities come with certain rights including the voting rights to which the investors are entitled. The level of corporate control depends on whether the equity is classed as ‘ordinary’ or ‘preferred’ and on the size of your shareholding.
Ordinary shares represent the majority of shares held by investors. When you own an ordinary share of a company, you usually have one vote per share that entitles you to participate in the election of the board of directors.
Despite their name, preference shares have fewer rights than ordinary shares, except in one important area – dividends. Companies that issue preference shares usually aim to pay consistent dividends and preference shareholders have ﬁrst call on dividends. In the event that a company is liquidated, preference shareholders have prior claim to assets over ordinary shareholders. This feature allows the company to raise capital from venture capitalists before it goes public because most venture capital deals are structured as preference shares.