What are the benefits of investing in Equity Shares?

When investing, it is critical to be aware of your risk appetite and consequently, balance the amount of risk involved in your investments. Equity is an asset class that offers great potential in maximizing returns. However, you must be willing to take on the required risk which can range anywhere from moderate to high.

Apart from the inherent risk of investment, multiple factors discourage people from investing in the stock market. You must study the market consistently and then make such financial decisions.

Experienced and amateur investors have made significant gains with due financial planning and investing, especially in equity. There are numerous avenues available to you to invest in equities – Mutual funds, tax-saving equity-linked savings schemes ELSS, or investing directly in stocks. India has seen a growing interest from investors in equity. So, why is everyone dipping their foot into this risky affair? There sure are benefits of investing in equity that you should know about.

  1. Ownership

    Investing in shares of a company makes you a shareholder or a member of the company. In simple terms, you get ownership of the company and can exercise control. As an investor, you would enjoy a share of the income earned by the company. Additionally, you would also get voting rights in the company.
  2. Higher Returns

    The primary advantage of investing in equity is that it can generate high returns in a short time in comparison to other investment options like Bank FDs. Presently, the equity market is reaching all-time highs as it recovers from the Covid-19 setback of 2020. With appropriate stock picks and a solid trading strategy, the stock market can potentially provide you with unparalleled returns going forward.
  3. Dividend

    One of the benefits of investing in equity is that it offers returns in not just one, but two forms — capital appreciation and dividend income. A dividend is a distribution of surplus profits by a company to its shareholders. Dividend income is essentially an additional income to the investor.
  4. Limited liability

    There is always a risk of adversity when it comes to companies such as bankruptcy or operational losses. However, your liability as a shareholder or investor is restricted to the amount of investment you’ve made, and not a penny more.
  5. Liquidity

    Stocks are generally considered liquid assets. The shares can very easily transfer ownership. The average daily volume of transactions on NSE and BSE is considerably high. This means several buyers and sellers are participating in the market at any given point of the day.
  6. Beat inflation and facilitate wealth creation

    Inflation is one of the major constraints to wealth creation. The rate of return on your investment should ideally be higher than the inflation rate. The inverse case would result in wealth erosion. Investing in equities allows you to earn a high return rate that can potentially beat the inflation rate by a large margin. This is how equities facilitate wealth creation in the long term. History is proof, stock indexes have consistently outperformed return on debt and other investments instruments in the long term.
  7. Protection by SEBI

    In India, the stock market is regulated by the Securities and Exchange Board of India (SEBI). Amongst other functions, the regulatory framework created by SEBI is responsible for protecting the rights of all investors. SEBI has been instrumental in reducing the advent of fraudulent activities by companies or individuals.
  8. Right shares and bonus shares

    When a company requires additional capital, it can issue ‘rights shares’. A right issue ensures the preservation of ownership and control of existing shareholders, and they receive priority to invest, over other investors. Right shares are issued at a price lower than the market price of the company’s share. So, existing investors can take up this advantage or otherwise renounce such rights.

    Sometimes companies decide to issue bonus shares to their shareholders. Bonus shares are essentially free shares that are given to existing shareholders. Often, bonus shares are issued instead of dividends.

  9. Flexibility

    An investor looking to make an entry into the stock market can start with a rather small investment. Purchasing the stock of small-cap or mid-cap companies in smaller units would be the apt way forward. Another great benefit of investing in equity is that you can buy, sell or hold shares whenever and for however long you prefer.
  10. Tax advantage

    Equity investments offer tax benefits. Long-term capital gains (LTCG) up to Rs. 1 lakh from equity investments are exempt from tax. Otherwise, LTCG of above Rs. 1 lakh is taxed at 10%. Short-term capital gains (STCG) from equity investments are taxed at 15%. The return earned on debt or gold invites a higher tax obligation than equities do.
  11. Streamlined processes and transactions

    The process of buying and selling stock is rather simple. One can buy stock with the help of a broker, financial planner, or even online. It doesn't take much to set up an account and get it rolling. Buying and selling stocks has been made effortless with the help of digitization.
  12. Collateral against loans

    This is one of the benefits of investing in equity funds that usually get lost in translation. As a shareholder, you can pledge your investments in qualified shares or equity mutual funds with a bank and get a loan against such investment. Once you repay the loan, the pledge can be rescinded. Generally, banks allow loans up to 50% of the eligible shares or 50% of the value of equity mutual funds owned.
  13. Diversified investments

    A general rule for investing is to diversify. The common adage is – “don’t put all your eggs in one basket”. Diversification helps reduce risk concentration associated with a particular investment instrument. Equity investments deliver an acute edge by diversification. Stock market fluctuations are independent of other investments such as bonds and real estate. Adding stock to your portfolio means greater risk but it also delivers sizable and rapid gains. This can also assist you, as an investor, to avoid overly conservative investment strategies.

Who should invest in Equity?

It’s important to understand that investing your entire corpus into equities is not a smart financial move. There are several factors such as your age, risk appetite, return expectation, and investment tenure, which impact how much you should invest in equity. Diversification across different asset classes and also in different shares and equity funds is essential to reduce the risk. It is advisable to take stock recommendations only from qualified financial advisors.

Final word

The benefits of investing in equities and equity funds are clear. Equity undoubtedly has great potential to generate returns. However, you must invest intelligently – be driven by facts and not emotions. Minimizing risks and earning the desired return is the long-term game.