Addressing the conundrum of investing in equities

Today our focus of discussion will be centered on Equity investment. From my observation after some years of working in Ghana, I noticed many investors in Ghana and in many other African countries have qualms about investing in equities.

Indeed, there could be several reasons why some investors might be hesitant to invest in equities (stocks). It is however important to note that investing preferences and decisions vary from individual to individual, and therefore not all investors share the same concerns. It is very difficult to understand why some investors do not like to invest in equities but here are some of the reasons.

The issue of risk tolerance of the investors. Equities can be volatile, with prices subject to rapid fluctuations due to market sentiment, economic conditions, and company-specific factors. Some investors may have a lower risk tolerance and prefer more stable investment options.

The lack of understanding of investment products. Investing in stocks requires a certain level of financial literacy and understanding of the stock market. Investors who lack knowledge about how stocks work and how to analyze companies may feel uncomfortable investing in equities.

The fear of short-term volatility of the equities. The stock market can experience short-term volatility that may lead to losses if investors panic and sell during downturns. Some investors might not have the emotional capacity to withstand this volatility.

These concerns can be addressed if investors would understand how equities work. This will help them to develop an appetite for considering equities in their investment decisions.

What then is equity investment?

Equity investment refers to investing in shares or stocks of publicly traded companies. When you invest in equity, you become a partial owner or shareholder of the company. Equity investments offer several advantages that make them a compelling asset class to consider. There are several reasons why equity investments are often considered beneficial but just to list a few of these reasons.

Potential for Higher Returns:

Historically, equity investments have the potential to generate higher long-term returns compared to other asset classes like bonds or cash. Over extended periods, well-managed companies with strong growth prospects can deliver significant capital appreciation, dividend income, and overall wealth accumulation.

Ownership and Participation

The second reason is Ownership and Participation. By investing in equity, you become a shareholder and gain partial ownership in the company. This ownership provides the opportunity to participate in the company's growth and success. Shareholders can benefit from increased stock value, dividend distributions, and even voting rights in important company decisions.

Diversification and Risk Management

The third reason is the Diversification and Risk Management purposes. Equity investments can help diversify your investment portfolio. By spreading your investments across different stocks from various sectors and regions, you can reduce the risk associated with holding a concentrated position in a single company or sector. We also know that diversification helps mitigate potential losses if one investment performs poorly, as other investments may offset the impact.

Inflation Hedge

The third reason is about Inflation Hedge. Equity investments have the potential to act as a hedge against inflation. As we know it, inflation erodes the purchasing power of cash and fixed-income investments over time. However, equities have historically demonstrated the ability to outpace inflation and maintain real returns, as companies can raise prices and generate higher profits in inflationary environments.

Liquidity

Liquidity of the investment asset is the fourth reason an investor would like to invest in equities. Equity investments typically offer high liquidity in very efficient markets, allowing investors to buy or sell shares in publicly traded companies easily. The stock exchanges provide a platform for investors to trade shares on a regular basis. This liquidity provides flexibility, allowing investors to adjust their holdings based on changing market conditions or individual needs even though this does not work well in Ghana. But once the stock market in Ghana becomes very efficient, the market will also become more liquid than it is now.

Transparency and Full Disclosure

Transparency and availability of information of the equities is the fifth reason. For the purposes of investor protection, publicly traded companies are subject to regulations that require them to disclose financial statements, reports, and other relevant information to the investing public. This transparency ensures that investors have access to critical information for making informed investment decisions.

Flexibility and Accessibility

The final reason is the Flexibility and Accessibility of the equity investments. Equity investments are accessible to a wide range of investors. Whether you are an individual investor or institutional investor, you can participate in the stock market through brokerage accounts or mutual funds. The availability of online trading platforms outside Ghana, and various investment products has made equity investing more convenient and accessible to the investing public.

While equity investments offer significant potential for growth and wealth creation, it's important to recognize that investing in equity also come with certain risks. The fact is stock prices can be volatile, and individual companies may face various risks and uncertainties. It's therefore crucial to conduct thorough research, diversify your holdings, and consider your risk tolerance before making investment in equities.

The key point here is that investing in equities requires careful thought process of your financial goals and objectives, time horizon, and risk tolerance. It's advisable to seek guidance from financial advisors or investment professionals like the EcoCapital team who can help assess your investment needs and develop a suitable equity investment strategy that aligns with your objectives for your peace of mind.

For a deeper understanding of this subject and further assistance kindly contact EcoCapital Investment Management Ltd., on +233(0)50 155 3502.

EcoCapital Investment Management Limited (EIML) is a company incorporated in Ghana, and licensed by the Securities and Exchange Commission (SEC) as an Investment Management firm, and by the National Pensions Regulatory Authority (NPRA) as Fund Manager of both second and third tiers pension schemes.

The corporate mandate of our firm is to provide premium financial solutions and investment management services to both retail and institutional investors in Ghana. Our services include Wealth Creation and Management, Investment Portfolio Management, Pension Fund Management, Mutual Funds, Retirement Planning, Investment Research and Advisory.

The firm has three mutual fund products under management, namely; EcoCapital Prime Fund, EcoCapital Nordea Income Growth Fund, and EcoCapital Weston Oil & Gas Fund.

Written By:
Dela Herman Agbo, MBA, MSc, CGIA
Chief Executive Officer
EcoCapital Investment Management Ltd.