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A company is owned by it’s shareholders. A share in a company allows its holder to participate in the profits, as well as any losses, that the company might generate. Shares therefore represent the risk-bearing part of a company’s capital. This is in contrast, to a company’s debt which is usually secure on it’s assets and which has priority over shareholders if the company becomes insolvent and it’s assets are distributed.

Equities are an alluring investment. They offer the chance of an exceptional gain over a relatively short period. Cairn Energy, an oil exploration company provides a recent example. At the beginning of 2004, each one of it’s shares was valued at around 400p. Less than nine months later, thanks to a series of oil finds in India, it’s shares were trading at nearly 1600p, a gain of some 300 percent. The company became of of the 100 largest companies traded on the London Stock Exchange, gaining entry to the prestigious FTSE 100 in the process. Cairn Energy shares have subsequently traded at over 2000p each.

Over longer periods, the rewards can be even more marked. Hundreds of employees in what is now the global software giant Microsoft, from managers to secretaries, were given options to buy shares in the company in the 1980s when its future was far from certain. Through to the end of the 1990’s the Microsoft share increased more than 500-fold meaning an original investment of £1000 would have been worth £500,000. Large numbers of employees who exercised their options and realised their gains were made instant “Microsoft millionaires”.

But just as there are success stories, there are also stories of failure. When a company warns that it’s profits may fall, or even not grow as fast as previously, contrary to the expectations of the market, it is common for its share price (and therefore the value of any holding) to fall by 10%, 20% or potentially even more. And when a quoted company fails completely, it’s shareholders are left with valueless bits of paper; they can lose the value of their investment in the company in it’s entirety. Even if the company manages to continue trading in some form, shares in the company can become all but worthless.

Picking which companies to own, which industries to have exposure to, or in other words how to structure and manage a portfolio of equities, is not an easy task and the private investor is well advised to seek professional advice. This can be achieved through the services of a stockbroker or investment manager, who can manage a portfolio of directly held equities on an individual basis. It can also be achieved with increasing popularity, through the use of collective investment vehicles such as unit trusts and OEICs. In this case the fund manager will effectively run his or her own portfolio of directly held equities, often following a particular theme such as income or growth, and the private investor will then have shares, or units, in this portfolio.

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