If you had to, you could think of Equities as being small pieces of a company’s worth, once you’ve taken into account any pending liabilities. By investing in a company by purchasing equities, the purchaser becomes 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. You can, depending on the company’s policy, be eligible to receive dividends from the company. In some cases, depending on the percentage of equity shares owned, the shareholder can also have a right to vote with respect to important decisions that are made by the Board of Directors.
Here are 3 things to keep in mind about burying equities.
1. Redeeming Capital: Those who have purchased equity shares from a company can only make a claim on the company’s value in case of a liquidation event, and that too only after all liabilities have been paid off. The only other way to get a return on investment on equities is to receive dividends, and trade the share when it’s value moves above your purchase price.
2. Voting rights: When an individual purchases equity shares from a company, they become a partial owner with the right to vote at company meetings. Given that most people are buying equities of publicly listed companies with a highly fragmented shareholder base, it is usually left to the Board of Directors to handle as they are the appointed representatives of the shareholders of a company.
3. Limited liability: Ordinary shareholders of a company are not impacted directly by the losses of a company in that they are not responsible for debt obligations and other financial troubles brought by a period of losses. 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.
1. High risk, high reward: If the risk pays off, equity shares can give high returns to the shareholders. The investors enjoy the profits through dividend earnings as well as appreciation of the company.
2. Easy and efficient: Through a stockbroker or financial planner, one can invest in equity shares at any company they please. All they need is a Demat account to trade the stocks with.
3. Diversity: One can add to their existing investment portfolio by investing in equity shares across a number of thematic areas, from trading based on the capitalization of a company, to equities of companies in a particular sector. Thus, not only do equities lend greater diversity to your existing portfolio, you can also diversify your mix of equities for better and more stable returns.
As every tool has its advantage, it is equally important to learn about the other side, the negative possibility:
1. High risk, high reward: While the possibility to earn through high returns is present, in comparison to other options, the risk of investment is also high.
2. Linked to performance: Since the equity shares are linked with the market, their performance can fluctuate greatly and often take a turn for the worse without warning. This can be with respect to a single stock or with stocks within a larger sector as well.
3. Inflation risk: If a country’s economy experiences inflation, the worth of the company can fall which in turn will affect its shares and not provide the returns that were expected impacting the profits that were to be generated.
4. Risk of Liquidity: When a company cannot repay their debts, they may opt for liquidation which in turn could require the shareholders to sell their shares at a price lower than market price.
5. Social and Political fluctuation: The social and political climate in a country and the goals associated with the same can impact the growth of the company which in turn would impact profits generated and therefore the benefits that a shareholder could have received.
Now that you have a better sense of what an equity/ share is, let’s take a look at the different methods by which you can invest in them.
This is the simplest way of buying shares. You know there is a company that you have faith in. You’ve done all your research and analysis and feel that shares of the company will appreciate within the time-frame in which you want a return. You go ahead and buy shares.
This is when a number of investors collect funds and at least 60% of those funds are invested in equity shares of various companies. Mutual funds can be further divided into the following categories:
1. Large cap equity funds: The fund invests only large companies with stable returns.
2. Mid cap: The fund’s investment thesis revolves around investing companies of smaller size but with higher potential for growth. This is a balance between risk and potential reward.
3. Small cap: investments are made in small and volatile companies with a high risk to reward ratio.
4. 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.
Here you invest in equity through methods such as hedge funds, private equity firms, venture capital funds. Each of these options will have their own investment theses and you’ll have to see not only which one suits your needs, but also which one you can afford to invest in, as many of these target high-net worth individuals and institutions for their funding pools.
As you should see, investing in equities is far from simple. Whilst most opt for doing so through a mutual fund, even that requires a great deal of research as you need to have a deep understanding of the mutual fund investment theses, performance and the fund manager’s credibility before deciding to park your money in such a fund. If you do have time on your hands, and can dedicate the hours needed to really understand trading equities on the stock market, or have strong incentive to do invest in a particular company, you may be able to dedicate yourself to the same entirely and invest directly in stocks, though it is advisable to seek to advice and help of someone with greater experience given how volatile the asset class can be.