Investing in Equities

Updated October 23, 2026

Equities have produced the strongest long-run returns of the mainstream asset classes, and they are also the ones most capable of falling 40% and staying there for years. Both facts matter equally. Updated September 2026.

Rewards and risks

The rewards come in two forms. Capital gains arise when the share price rises above your purchase price, and dividends are cash payments some companies distribute from profits.

The risk is the same mechanism in reverse. Share prices fall as well as rise, individual companies can fail entirely, and there is no floor under a stock price.

There is also opportunity cost. Money invested in equities is not available for anything else, including opportunities that appear later, and selling at a bad moment to access it is how paper losses become real ones.

What average returns actually mean

The long-run average annual return of major stock indices is frequently quoted at around 10% before inflation, and it is genuinely impressive over multi-decade periods.

But an average built from decades hides what the path looks like. That figure includes periods where markets fell sharply and took years to recover, and an investor who needed their money during one of those stretches did not receive the average.

The practical implication is about time horizon. Long-run equity returns are available to someone who can leave the money invested through a downturn. They are not available to someone who may need it within a few years, which is why the same investment is appropriate for one person and inappropriate for another.

Index ETFs against individual stocks

Individual companies can go bankrupt or grow enormously. An index ETF holding hundreds of stocks will not move much if one constituent fails, because the exposure to any single company is small.

This is diversification: spreading risk across many holdings so that no single outcome dominates. Holding 30, 40 or more positions substantially reduces company-specific risk.

For most people, exchange-traded funds are the better choice. They carry lower risk than individual stock picking and require far less research. Large capitalisation index ETFs, tracking broad established indices, are the standard starting point.

Worth being clear about what diversification does not do. It removes the risk of one company failing. It does not remove market risk: when the whole market falls, a diversified portfolio falls with it.

Investing styles

• Growth investing: buying companies expected to grow earnings faster than the market

• Value investing: buying companies trading cheaply relative to their fundamentals

• Momentum investing: buying stocks or ETFs already moving strongly in one direction

• Buy and hold: acquiring companies with strong fundamentals and holding through cycles

• Technical investing: making decisions from chart patterns and price behaviour

Each requires different research and suits a different temperament. Picking individual stocks under any of these styles means more work than holding an index fund, and the additional return is not guaranteed to justify it.

Other asset classes

Equities are not the only option. Bonds are generally less volatile than stocks and produce correspondingly lower long-run returns, which is the standard trade-off.

Collectibles are sometimes cited as producing comparable or better returns, with unopened Lego sets and similar markets showing strong appreciation rates in published studies.

Those comparisons deserve scepticism. Collectible markets are illiquid: selling means finding a specific buyer, which can take months, and the quoted return often excludes storage, insurance and transaction costs. Published indices also suffer survivorship bias, tracking items that retained value while ignoring those that did not.

Liquidity is the reason equities remain the default. A broad index ETF can be sold within seconds at a published price during market hours, which no collectible market can match.

Starting out

• Decide your time horizon first, it determines whether equities are suitable at all

• Start with a broad market index ETF rather than individual stocks

• Check the fund's ongoing charge, small percentage differences compound significantly over decades

• Use a broker regulated in your jurisdiction and compare total costs, not just headline commission

• Decide in advance what you will do in a falling market, that decision is much harder to make during one

This is general information, not investment advice. Compare platforms in our stock brokers section and see related trading guides.

Equity investing: frequently asked questions

What are the rewards of equity investing?

Capital gains when the share price rises above your purchase price, and dividends paid by companies distributing profits to shareholders.

Are index ETFs better than individual stocks?

For most investors, yes. They spread risk across hundreds of companies, require far less research and remove the risk of a single company failing.

What does a 10% average return actually mean?

An average across decades, including periods of sharp decline and slow recovery. An investor who needed their money during a downturn did not receive that average.

How to Invest in Equities

Does diversification remove all risk?

No. It removes company-specific risk, but not market risk. When the whole market falls, a diversified portfolio falls too.

Are collectibles a good alternative?

They are illiquid, and quoted returns often exclude storage, insurance and transaction costs while suffering survivorship bias. Equities remain far easier to sell.

What should I decide before investing?

Your time horizon, since it determines whether equities are suitable, and what you will do in a falling market, which is much harder to decide during one.