Equities

When you buy a share in a company, you are not lending it money and you are not buying a product. You are acquiring a fractional ownership claim — a slice of the business itself. That slice entitles you to a proportional interest in the company's assets, its future earnings, and in the event of…

In the immediate term, a share price is determined by the same mechanism that sets the price of anything traded in a market: supply and demand. If more investors want to buy a stock than sell it, the price rises until sellers are willing to part with their shares. If more want to sell than buy…

Not all shares are the same. The most common type is the ordinary share (called "common stock" in the United States): it carries voting rights and a residual claim on earnings after all other obligations are met. Ordinary shareholders are last in line in a liquidation but fully participate in the…

Discounted cash flow models are powerful but require dozens of assumptions about the future. For a quicker, comparative view of whether a share looks cheap or expensive, investors use valuation multiples — ratios that express the share price (or total enterprise value) relative to some measure of…

At the heart of all serious equity valuation is a single idea: a company is worth the present value of all the free cash flows it will ever generate. This principle was formalised by John Burr Williams in The Theory of Investment Value (1938), one of the most important books in the history of…

Warren Buffett popularised the concept of the economic moat — the sustainable competitive advantage that protects a business from competition and allows it to earn returns above its cost of capital for extended periods. The metaphor is apt: just as a water-filled moat made a medieval castle harder…

Every listed company is required to publish financial statements — structured reports of its financial position and performance. For investors, these statements are the primary source of objective, audited information about a business. There are three core statements, each telling a different part…

Return on equity (ROE) measures the profit a business generates relative to the equity capital it employs. It is calculated as net income divided by shareholders' equity, expressed as a percentage. A business earning £10 million on £100 million of equity has a 10% ROE.

Value investing and growth investing represent the two dominant philosophies of stock selection, each with a long intellectual history and a substantial body of supporting evidence.

An index fund is a fund designed to replicate the performance of a market index — a defined basket of securities — at minimal cost, rather than to outperform it through active selection. It buys and holds the securities in the index in proportion to their weighting, adjusting only when the index…

Stock picking — the practice of selecting individual securities expected to outperform the market — is arguably the most culturally celebrated activity in investment. Figures like Warren Buffett, Peter Lynch, and George Soros have generated spectacular multi-decade records. The financial media is…

The return from owning a share comes from two sources: capital appreciation (the share price rising) and income (dividends paid). Together, these constitute the total return. An investor who receives a 3% dividend yield and experiences 7% capital appreciation has earned a 10% total return…