Equities refer to small pieces of a company’s worth, considering all pending liabilities. If you are investing in a company by purchasing equities, you become an owner of the company in the same ratio as the equities bought. If you’re looking to turn a profit, the best way to do so is to sell the equities you’ve purchased when they grow in value. In some cases, depending on the percentage of equity shares owned, the shareholder can also have a right to vote on important decisions that are made by the Board of Directors.
Features of owning Equity
1. Redeeming capital: If you have purchased equity shares from a company, then only you can claim the company’s value in case of liquidation. Another way to get a return on investment on equities is dividends, and trade the share when its value moves above your purchase price.
2. Voting rights: If you purchase equity shares from a company, you become a partial owner with the right to vote at company meetings. Most people buy equities of publicly listed companies with a highly fragmented shareholder base, so it is usually left to the Board of Directors to handle all this as they are the appointed representatives of the company.
3. Limited liability: Ordinary shareholders of a company are not impacted directly by the losses of a company. The only impact they will feel is in the depreciation of the value of the shares they hold, which would impact their net worth and their profit-turning prospects.
Benefits of purchasing Equity
1.High risk, high reward: Equity shares can give high returns to the shareholders if the risk pays off. Investors enjoy the profits through dividend earnings as well as the appreciation of the company.
2.Easy and efficient: You can invest in equity shares at any company through a stockbroker or financial planner. All you need is a Demat account to trade.
3.Diversity: You can invest in equity shares across many thematic areas, from trading based on the capitalization of a company, to equities of companies in a particular sector. Thus, equities lend to greater diversity for better and more stable returns.
Disadvantages of owning Equity
- High risk includes high losses too: The possibility to earn through high returns is present, but the risk of loss is also high.
- Linked to performance: Since there is a link between the equity shares and the market, their performance can fluctuate greatly and often take a turn for the worse.
- Inflation risk: If a country’s economy experiences inflation, the company’s worth can fall which in turn will affect its shares and not provide the returns that were expected and impact the profits that were to be generated.
- Risk of Liquidity: When a company is unable to repay its debts, it may opt for liquidation which requires the shareholders to sell their shares at a price lower than the market price.
- Social and Political fluctuation: The social and political climate of a country and the goals associated with the same can impact the growth of the company. This, in turn, impacts the profits generated and therefore the benefits that a shareholder could have received.
Types of Equity
This is the simplest way of buying shares in a company that you have faith complete in The shares of the company will appreciate within the time frame in which you want a return.
2.Equity-Mutual fund investments:
This is when several investors collect funds and at least 60% of those are invested in equity shares of various companies. Mutual funds can be further divided into the following categories:
- Large-cap equity funds: The fund invests only in large companies with stable returns.
- Mid-cap: The fund’s investment thesis revolves around investing in companies of smaller size but with higher potential for growth. This is a balance between risk and potential reward.
- Small-cap: investments are made in small and volatile companies with a high risk to reward ratio.
- Multi-cap funds: These funds invest in companies of all sizes across a variety of sectors.
Mutual Funds are the way in which most people invest, as they are run by professional investors who take investment decisions for you.
3.Alternative Investment Funds:
In this, you invest in equity through various methods wherein each of those options have their investment theses. You have to see not only which one suits your needs, but also which one you can afford to invest in.
Investing in equities is far from simple and while most do it through a mutual fund, that requires a great deal of research, performance and the fund manager’s credibility before deciding to park your money in such a fund. If you do have time and can dedicate the hours needed to understand trading equities or have a strong incentive to invest in a particular company, you may be able to dedicate yourself to the same entirely and invest directly in stocks. It is advisable to seek advice and help from someone with greater experience given how volatile the asset class can be, like the experts at IIFL.