Advantage of Equities

Investment in stocks and shares – equities – has a unique advantage over other asset classes which is rarely understood and almost never discussed.  Equities can compound in value in a way investments in other asset classes, such as bonds and real estate cannot.  The reason is companies retain a portion of the profits they generate to reinvest in the business.

If you look at companies in the major indices, such as the S&P 500 or the FTSE 100, you will find that on average companies pay out about half their earnings in dividends.  The earnings that are not paid out are invested in the business.  No other asset class provides this.  If you own bonds, you receive an interest payment but it is not automatically re-invested in the bonds.

Similarly, if you own real estate, you will receive rental income but none of it will be reinvested in property for you.  As well as being a unique feature of equity investment, this can also be a valuable source of compounding in the value of your investments.  

John BaxterComment