Physical equities refer to the actual ownership of shares in a publicly traded company. When an investor buys physical equities, they own a portion of the company and may be entitled to voting rights, dividends, and other shareholder benefits. Unlike derivatives like options or CFDs, where the trader speculates on the price movement of the underlying asset without owning it, purchasing physical equities means acquiring a tangible stake in the company.

How Physical Equities Work

When you buy shares of a company, you become a shareholder, meaning you own a part of that company. Your returns on physical equities come from two main sources:

1. Capital Gains: If the value of the company grows, the price of its shares generally increases, allowing you to sell the shares later for a profit.
2. Dividends: Many companies distribute a portion of their profits to shareholders in the form of dividends, providing a regular income stream in addition to any potential capital gains.

T+2 Settlement Cycle

In the UK and most major markets, stock trading follows a T+2 settlement cycle. This means that when you buy or sell a stock, the transaction is officially settled two business days after the trade is executed.

• “T” stands for the trade date, or the day the trade is initiated.
• “T+2” means that the transfer of ownership and the settlement of cash take place two business days later. For example, if you buy shares on a Monday, the transaction will settle on Wednesday.

This settlement cycle gives both the buyer and seller time to ensure funds and securities are available to complete the transaction. While the ownership of shares doesn’t officially transfer until settlement, traders can still execute trades immediately, and the risk of counterparty default is minimized.

Advantages of Physical Equities

1. Ownership: When you own physical shares, you have direct ownership in the company, which can give you voting rights on important corporate decisions, such as board elections and major company policies.
2. Dividends: Shareholders of physical equities are eligible for dividends, which can provide a stable income stream, especially with dividend-paying stocks.
3. Long-Term Investment: Physical equities are often viewed as a long-term investment. Historically, equities have outperformed other asset classes like bonds or savings accounts over extended periods.
4. Liquidity: Stocks are generally very liquid, meaning you can buy and sell them quickly in the stock market.

Risks of Physical Equities

1. Market Risk: The value of physical equities fluctuates based on market conditions, company performance, and broader economic factors. Stock prices can rise or fall sharply, leading to potential losses.
2. Dividend Cuts: Companies can reduce or eliminate dividend payments during financial downturns or when they choose to reinvest profits back into the business.
3. Limited Leverage: Unlike derivative products, buying physical shares typically requires more capital, as there is no leverage to amplify your exposure (unless margin accounts are used, which still involves borrowing).

Conclusion

Physical equities represent direct ownership in a company, offering the potential for long-term capital gains and dividends. With a T+2 settlement cycle, the trading of physical equities provides relatively quick settlement, though it’s important for investors to be aware of market risks, dividend uncertainty, and the need for sufficient capital when acquiring physical shares. Physical equities are suited for investors looking for stability, potential long-term growth, and a tangible stake in the companies they believe in.