Equities
Equities (also called shares or stocks) represent part ownership in a company. When you buy shares, you become a shareholder — entitled to a portion of that company's profits and any change in its market value, reflected in the share price.
Unlike bonds or credit, equities have no fixed payments — returns depend on how businesses perform and how investors price that performance. Returns come from dividends (cash payments from company profits) and capital growth (an increase in share price over time).
Share prices move for two main reasons:
(1) Fundamentals – the company's actual performance. When earnings grow or inflation allows prices to rise, the company's valuation (overall market value) increases.
(2) Revaluation – changes in investor behaviour or market conditions, even if earnings stay the same. Lower interest rates or optimism can lift share prices, while higher rates or fear can pull them down.
Investors typically access equities through ETFs and managed funds. Buying an ETF works like buying a share on the stock exchange — but instead of owning one company, the ETF holds many, giving instant diversification across different industries and regions. Managed funds are usually bought directly from the fund via filling out an application. They don't trade on the exchange, and withdrawals are processed at set intervals — typically daily, weekly, or monthly — depending on the fund. Many managed funds are now listed on exchanges as Active ETFs, combining professional management with the convenience and liquidity of ETF trading.
Total Return ≈ Dividends (current income) + Earnings Growth (rising income) ± Valuation (price changes)
Equities sit above bonds and credit on the risk–return scale. Their prices can fluctuate more in the short term, but over time they are a key driver of wealth growth and help protect purchasing power from inflation.
Interactive: Equity Indexes — Risk vs Return
Illustrative mid‑points derived from the table ranges.
Key Stock Market Indexes — Risk vs Return
- NASDAQ — Technology-focused, higher volatility (Risk: 30%, Return: 10.5%)
- S&P 500 — Broad US market (Risk: 25%, Return: 9.5%)
- ASX 200 — Australian large cap (Risk: 20%, Return: 8.5%)
- S&P/ASX Small Ordinaries — Australian small companies (Risk: 35%, Return: 10.0%)
- S&P Small Cap 600 — US small companies (Risk: 37%, Return: 11.0%)
- MSCI Emerging Markets — Developing economies (Risk: 40%, Return: 10.0%)
- MSCI ACWI — Global developed + emerging (Risk: 25%, Return: 9.0%)
Major Sector Weights by Index
| Index | Approximate Major Sector Weights | Source & Notes |
|---|---|---|
| S&P 500 (US) | Technology ~28%, Health Care ~15%, Financials ~13%, Consumer Discretionary ~11%, Industrials ~8% | From a sector-weight chart for S&P 500. (MacroMicro) |
| NASDAQ-100 (US Tech-Focus) | Technology ~55%, Consumer Services ~25%, Health Care ~8% | From a NASDAQ-100 vs S&P 500 fact sheet. (Nasdaq Global Index Watch) |
| S&P/ASX 200 (Australia) | Financials ~33.9%, Materials ~20.7%, Health Care ~7.9%, Consumer Discretionary ~7.8%, Industrials ~7.4% | From the STW ETF's index breakdown. (State Street Global Advisors) |
| MSCI ACWI (Global Developed + Emerging) | Information Technology ~28%, Financials ~16–17%, Industrials ~11–12% | From MSCI World/ACWI summary. (Wikipedia) |
Global Equity Market Share by Country/Region
Approximate share of global equity markets by country/region. Source: Visual Capitalist
Passive vs Active Investing
| Factor | Passive (Index Funds / ETFs) | Active (Managed Funds / Active ETFs) |
|---|---|---|
| Definition | Tracks a market index (e.g. ASX 200, S&P 500) to match its performance. | Professional managers select investments aiming to outperform a benchmark. |
| Fees | Low ongoing fees (typically 0.05 – 0.30% p.a.), keeping more of your return. | Higher fees (often 1 – 2% p.a. plus performance fees) that must be outweighed by consistent outperformance. |
| Performance vs Benchmark | Closely tracks the benchmark after fees; matches market returns. | Research shows that around 75% of managed funds underperform their benchmark after fees over the long term. |
| Risks | Market risk only (rises and falls with the index). | Market risk plus manager risk — performance depends on the manager's skill, process, and discipline. |
| Liquidity | ETFs trade throughout the day on the exchange. | Managed funds process redemptions daily, weekly, or monthly; Active ETFs trade intraday like shares. |
| Key Takeaway | Simple, low-cost way to capture market returns — suitable as the core of most portfolios. | Can be appropriate if a manager shows persistent after-fee outperformance versus a clear benchmark; best used to complement index holdings. |
Broad Market (Index) ETFs
| Market Exposure | Index Tracked | What It Covers | Example ETF |
|---|---|---|---|
| Australian Equities | ASX 200 | 200 largest listed companies in Australia — e.g. CBA, BHP, Woolworths, Wesfarmers | IOZ |
| US Equities | S&P 500 | 500 major US companies across all sectors — e.g. Apple, Microsoft, Coca-Cola | IVV |
| US Technology Focus | NASDAQ 100 | 100 leading US technology and growth companies — e.g. Amazon, NVIDIA, Alphabet | NDQ |
| Global Equities | MSCI ACWI | 2,800 large companies across developed and emerging markets — US, Europe, Asia | VGS |
| Developed Markets (ex-US) | MSCI World ex-US | Major developed countries excluding the US — Japan, UK, Germany, France | IVE |
| Emerging Markets | MSCI Emerging Markets | Largest companies in faster-growing economies — China, India, Brazil, South Korea, Taiwan | VGE |
ETF Styles and Investment Methods
ETFs can follow different styles or weighting methods, which affect performance, volatility, and diversification.
| Style / Method | What It Means | Example ETF (ASX) |
|---|---|---|
| Market-Weighted | The largest companies make up most of the ETF. This is the standard approach, giving broad exposure to established businesses. | IOZ – iShares Core S&P/ASX 200 ETF |
| Equal-Weighted | Each company is given the same weight, rather than being dominated by the biggest firms. This balances exposure across all companies in the index. | MVW – VanEck Australian Equal Weight ETF |
| Small / Mid Cap | Invests in smaller and mid-sized Australian companies with higher growth potential but larger short-term swings. | VSO – Vanguard Australian Small Companies ETF |
| Value | Buys companies that appear "cheap" based on earnings or assets — often banks, resources, or industrials. | VVLU – Vanguard Global Value Equity ETF |
| Growth | Focuses on fast-growing companies — often in technology or healthcare — that reinvest profits and perform best when interest rates are low. | TECH – BetaShares Global Technology ETF |
| Quality / Profitability | Selects financially strong companies with stable earnings and solid management that tend to hold value better in downturns. | QHAL – VanEck MSCI International Quality ETF (Hedged) |
| Thematic / Sector | Targets a specific theme or industry (e.g. clean energy, ESG, or technology). Narrower exposure means higher concentration risk. | CLNE – VanEck Global Clean Energy ETF |
Equity Valuations & Future Expectations
Valuation measures help investors understand whether share markets appear "cheap" or "expensive" compared with history — and what that might mean for long-term return expectations.
| Term | What It Measures | Simple Example | What It Means for Investors |
|---|---|---|---|
| P/E (Price-to-Earnings Ratio) | How much investors are willing to pay today for each $1 of a company's yearly profit. | A P/E of 20 means investors are paying $20 for every $1 the company earns each year — or roughly expect it to take 20 years of earnings to repay the price, if profits stayed flat. | High P/E = "expensive" (investors expect strong future growth). Low P/E = "cheap" (expect slower growth or higher risk). Historically, high-P/E markets have delivered lower future returns once those expectations cool. |
| CAPE (Cyclically Adjusted P/E) | A longer-term version of P/E that averages profits over 10 years to smooth booms and recessions. | If the US market's CAPE is 30 and its long-term average is 20, today's market is about 50% more expensive than usual. | When CAPE is far above average, markets tend to produce below-average long-term returns. When it's well below average, long-term returns have historically been stronger. |
| Dividend Yield | The yearly cash income investors receive as a percentage of the share price. | A 4% yield means $4 paid in dividends for every $100 invested each year. | High yield = cheaper market (prices are lower relative to dividends). Low yield = expensive market (prices are higher). Over time, higher yields contribute more to total return. |
| Earnings Growth | How fast company profits are increasing. | If earnings rise from $1.00 to $1.10 per share, that's 10% growth. | Faster growth supports higher valuations — investors are willing to pay more for companies whose profits grow quickly. Slowing growth can make even good companies look expensive. |
Market Valuation vs Expected Return
Illustrative relationship between market valuations (CAPE) and expected long-term returns.
| Starting Shiller P/E (CAPE) | Avg 10-yr real return (p.a.) | Worst 10-yr | Best 10-yr |
|---|---|---|---|
| 5.2 – 9.6 | 10.3% | 4.8% | 17.5% |
| 9.6 – 10.8 | 10.4% | 3.8% | 17.0% |
| 10.8 – 11.9 | 10.4% | 2.8% | 15.1% |
| 11.9 – 13.8 | 9.1% | 1.2% | 14.3% |
| 13.8 – 15.7 | 8.0% | −0.9% | 15.1% |
| 15.7 – 17.3 | 5.6% | −2.3% | 15.1% |
| 17.3 – 18.9 | 5.3% | −3.9% | 13.8% |
| 18.9 – 21.1 | 3.9% | −3.2% | 9.9% |
| 21.1 – 25.1 | 0.9% | −4.4% | 8.3% |
| 25.1 – 46.1 | 0.5% | −6.1% | 6.3% |
What to Consider
Broad exposure: Index ETFs that track large markets (e.g. ASX 200, S&P 500, MSCI World) provide instant diversification across many companies and sectors.
Global mix: Combine Australian and global ETFs for balanced exposure (e.g. 70–80% global and 20–30% Australian).
Passive core, optional active: Broad-market index ETFs often form the foundation of an equity portfolio. Some investors include active or factor-based funds to target specific markets or styles.
Keep costs low: Ongoing fees and trading costs compound over time. Lower-cost ETFs help more of your returns stay invested.
Currency exposure: Most ETFs on the ASX are priced in Australian dollars, even when they invest overseas. This lets investors access global markets without converting currencies. Some ETFs "hedge" against exchange-rate changes to make returns steadier in AUD, though this adds small costs.
Invest regularly: Contributing at set intervals averages entry prices and reduces the impact of short-term market swings.
Long-term focus: Equities suit goals with timeframes of five years or more, as prices can fluctuate in the short term.
Risks and Limitations
Market risk: Share prices can rise or fall quickly, especially during economic downturns or major events.
Behavioural risk: Selling in fear or chasing rising prices often reduces long-term returns compared to staying consistent.
Timing risk: The best market days often follow the worst. Missing just the 10 best days in the S&P 500 over 30 years would have cut total returns by about half (Morningstar).
Valuation risk: When prices are high relative to earnings, future returns may be lower, though predicting these shifts is unreliable.
Home-bias risk: Concentrating in Australian equities means heavy exposure to banks and resources — and missing out on broader global growth.
Concentration risk: A few large companies can dominate index performance. Holding a mix of markets, sectors, and styles can reduce this impact.
Currency risk: Global investments move with exchange rates. Hedged ETFs can reduce these movements but involve small additional costs.
Cost risk: Higher fees or frequent trading reduce net returns over time.
Time-horizon risk: Equities can underperform over short periods and are generally held for long-term goals.
Checklist
- Build the core of your portfolio with broad-market, low-cost ETFs.
- Diversify globally to reduce reliance on one market or sector.
- Be cost-conscious — lower fees leave more of each return invested.
- Invest regularly to smooth entry prices and reduce timing risk.
- Stay invested — time in the market matters more than timing the market.
- Rebalance occasionally, not frequently.
- Use active or factor funds only where they serve a clear purpose.
- Match investments to your timeframe — equities are designed for 5+ year goals.
- Stay disciplined — focus on process, not prediction.
Summary
A simple, diversified, and low-cost equity portfolio — built from broad-market ETFs, invested regularly, and held for the long term — has historically been one of the most effective ways to participate in global economic growth.
FAQ
No. Share price is what you pay for one share of a company. Market value is the total value of all shares — you multiply the share price by how many shares exist. For example, if a company has 1 million shares and each costs $50, the market value is $50 million.
Share prices are set when buyers and sellers agree on a price. If someone is willing to buy at $50 and someone else is willing to sell at $50, the trade happens at $50. When more people want to buy than sell, prices go up. When more people want to sell than buy, prices go down. Prices change throughout the day as people's willingness to buy or sell changes.
When prices rise (inflation), companies can charge more for their products, which can increase their profits. This can make their shares more valuable. Also, when cash loses value due to inflation, investors may move money into shares instead. However, if inflation rises too fast, it can hurt companies by increasing their costs faster than they can raise prices.
No. Indexes are updated regularly (usually every few months) to add growing companies and remove ones that are shrinking or no longer meet the requirements. Companies are added when they grow large enough, or removed if they get too small, are bought by another company, or go out of business. This happens automatically to keep the index representative of the market.
To time the market successfully, you need to know when to sell (before prices fall) and when to buy back (before prices rise again). This is very difficult because you need to be right twice — and you need to be right before everyone else. Missing just a few of the market's best days can significantly reduce your returns. Research shows that staying invested consistently works better than trying to time when to buy and sell.
Diversification means not putting all your eggs in one basket. A single broad ETF (like one tracking the ASX 200 or S&P 500) already spreads your money across hundreds of companies. For even more diversification, you can combine Australian, US, and global ETFs. Most investors can get good diversification with just 2-4 broad ETFs, rather than trying to pick individual stocks.
Yes. Even small fee differences add up over many years. For example, a 0.20% fee versus 0.50% on a $100,000 investment can cost you tens of thousands of dollars over 20-30 years. Lower fees mean you keep more of your returns. Always compare fees when choosing between similar ETFs.
Reinvesting dividends means using the cash payments to buy more shares automatically. This can help your investment grow faster over time because you're buying more shares, which can then generate more dividends. Many brokers offer automatic dividend reinvestment. This works well if you don't need the income now. If you need the income, you can take dividends as cash instead.
Rebalancing is the process of bringing your portfolio back to its target mix. If one part (such as global shares) grows faster and becomes too large, you sell a little of the outperformer or add to the lagging section so the portfolio returns to its chosen percentages.
Rebalancing means adjusting your investments to keep your target mix. For example, if you want 50% Australian and 50% US shares, you might rebalance when one grows to 60% and the other shrinks to 40%. You can rebalance once a year or when your mix drifts significantly. Don't rebalance too often, as it can increase costs and taxes. For most investors, once a year is enough.
High CAPE or P/E ratios mean markets are expensive compared to history, which usually means lower future returns. However, markets can stay expensive for years. These ratios are helpful for understanding context, but they're not signals to buy or sell. If valuations are high, consider staying invested through broad ETFs rather than making big bets. Lower valuations have historically provided better entry points, but predicting exact timing is unreliable.
Most popular ETFs are very easy to buy and sell, especially those tracking major indexes like the ASX 200 or S&P 500. They trade throughout the day just like individual stocks. Less popular or niche ETFs may be harder to buy and sell quickly. For major market ETFs, you can usually buy or sell immediately during market hours.
Hedged ETFs remove currency risk — your returns are smoother in Australian dollars, but you might miss out if foreign currencies rise. Unhedged ETFs keep currency exposure — your returns can go up or down based on currency movements. Hedged may suit you if you want smoother returns and don't want currency risk. Unhedged can provide natural diversification. Many investors use a mix of both.
Yes. When you receive dividends from ETFs, you generally pay tax on them in that year. The tax treatment depends on your situation (individual, super, etc.). Some dividends may include tax credits (franking credits for Australian companies). ETFs provide annual tax statements. Even if you reinvest dividends, you still pay tax on them — reinvestment doesn't defer tax.
Equities typically need at least 5 years to ride out market ups and downs. If you need the money within 1-2 years, consider lower-risk options like cash or bonds. For retirement savings (20-30+ years), equities are usually the main driver of growth. Match your time horizon to your goals — use equities for long-term wealth building, not money you might need soon.