This article is all about highlighting the benefit of Equity Investment in India. It shows that Indian investors can increase their wealth by investing in this asset.
Post the global crisis, many investors have already resorted to earning a secondary source of income through equity investing as the record number of Demat accounts opened in FY20-21 indicates.
However, it should be noted that the investment-related returns can either be set or market-linked. These investments do offer respectable returns. Various investment products can be found in varying investment categories.
When it comes to fixed investments, one can count FDs and post office deposits, whereas, when it comes to market-linked investments, equity investments like stocks and mutual funds are the most common to count.
Below, we talk about this in more detail.
What is Equity Investing?
The goal of equity investing is to buy shares directly from companies or other investors to sell them for a profit at a time when the market is high or for receiving dividends.
Investors can increase their profits when the value of their stock assets rises. The increase and fall of share prices determine when to buy or sell your shares.
It is common for equity investments to have ups and downs, and therefore having expert advice on equity investments is quite helpful for staying safe in the market. Additionally, diversifying an investor’s holdings across several businesses reduces risk.
Examples of equity investments include:
- Equity mutual funds
- Stocks
- Private equity investments
- Preferred shares
- Futures and Options
- Alternative Investment Funds
- Arbitrage Schemes
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How does Equity Investing work?
In layman’s terms, an investor purchases the shares while they are trading at a discount on the stock exchange market.
They keep an eye on the shares’ performance on the stock market and sell them for a profit when the price increases. Equities increase diversification in a portfolio’s asset allocation.
Besides this, many factors affect the share price of a company. Broadly they could be:
- External factors: Industry trends, market sentiment, economic factors.
- Internal/Company factors: Unexpected company events, share issuance, share buyback.
Essentially, the market’s supply and demand are other major factors in price variation. If there is a greater demand for a share than there is supply, the price will increase since there is a greater demand for the share. Conversely, if supply outpaces demand, the price will decline.
As the investor takes a buy or sell position, by studying the market trends, they will be able to earn wealth by investing wealth.
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Types of Equity Investment
A brief description of each type of equity investment is provided below. The information will help to understand the essence of each asset type and which one is the ideal match to meet your financial goals and risk appetite.
Equity mutual funds
Equity mutual funds are a type of investment instrument for those with a low-risk appetite. In this, the mutual fund provider tends to invest the fund money in various equities of varying companies.
Now, based on the mutual fund value and the return rate on the mutual funds, they are either large cap, mid cap, or small cap. This is perfect for those who have the least amount of knowledge regarding equities and the stock market.
Stocks
Stocks or shares are smaller entities of the companies that can be owned by the people who are investing in the firm. These investors are called the shareholders.
The value of a company’s shares depends on how well it performs. It is crucial to remember that shareholders have voting rights on corporate decisions. Voting power increases with the number of shares owned.
Share is either public or private. Public stocks are those companies that are listed and authorized in the stock markets like BSE, NSE, BYSE, etc.
These exchanges are the place where one can trade stocks. There are also private stocks of private or unlisted companies.
Private equity investments
Private equity is the private shares that are given to HNIs by small and unlisted companies. They make a straight-up investment in the company to help them grow and in return are given shares of the company.
Preferred shares
These are essentially normal stocks but they do not come with any type of voting privilege. Annual dividend payments are made to the preferred shareholders.
If a firm doesn’t announce its yearly dividends, it will nevertheless pay a total. Compared to regular shares, preferred shareholders are a high priority when it comes to distributing dividends.
Futures and Options
There are two options for investors when it comes to equities or stocks. They can be traded in the derivative market or can be bought and sold in the cash market.
When it comes to futures and options, one should keep in mind that the contract will allow the investors to invest in some type of underlying stocks at the going rate and the delivery is delayed to another future date.
Now that is it clear that futures and contracts are a type of derivative instrument, then it can be said that the value of these equity investments is derived from the underlying asset only.
The investors can either make big profits by risking the price change or can protect their underlying assets using the futures and options contracts.
Alternative Investment Funds (AIFs)
When it comes to alternative investment funds for equity investments, the idea is still pretty new in India and there are not many resources available.
One of the things about these alternative equity investment instruments is that they are highly regulated and only a certain set of investors can invest in them.
These alternative investment funds are managed by professionals and are privately held for the HNIs and other international investors to invest in them.
Arbitrage Schemes
In the stock market, there are multiple tools and techniques used by investors to get some profit. One such technique is arbitrage.
Under this technique, investors tend to buy equities and sell them at the very same time but at different marketplaces. It helps get some profit due to the price difference of the same securities at different marketplaces.
In this, investors tend to invest in derivative markets and equities at the same time. In this stock investment strategy, regardless of the market performance, one can still earn profits.
But a point that every investor needs to keep in mind is that the margin can be quite low in arbitraging. This is due to several commissions and fees that are to be paid for completing the transactions.
Why invest in Equity Investments?
Equity investments may produce extremely large profits at a much quicker rate, however, it is vulnerable to market changes and hence quite dangerous.
It is a profitable business that suits those searching for a long-term investment with the help of skilled financial experts. For many investors, equity investments are one of the best assets to buy in India.
Some more positive trait of this investment type is mentioned below:
Dividends and interest payments
As a shareholder, you are entitled to annual dividends and interest. Dividends are a component of the return on investment (ROI). Each share receives a certain proportion of interest.
Risk Spread
Any equities market that piques an investor’s attention might be chosen. Investing in many firms is simpler and less dangerous than putting all of your money into one company.
Profitability
Compared to other investments, equity investments have a substantially larger profit yield from capital gain. The difference between the share’s acquisition price and the market price determines how much one gains. The shares rise higher as the market becomes more robust.
Easily Transferable
The transfer of ownership of shares to another investor is simple and fluid. Furthermore, while shares are on the market, both new and current shareholders can increase their ownership.
Brokers or financial advisors can thus make transactions at any moment when the share price increases.
Simple to Monitor
Easy monitoring will be made possible by having a broker or advisor. They will make sure that transfers and purchases are made instantly. Within the allotted period, any necessary settlements can also be completed. While trading shares, time is important.
Who should invest in Equity Investments?
Like every asset class, equity investments also have certain risk and profit relationships that may not be suitable for all types of investors. Thus, below are certain characteristics that every equity-investing individual should have.
Appetite for Risk
If one wants to be a successful equity investor, then the first and foremost quality one must have is of having a bigger risk appetite.
If an investor is risk-averse or is scared of taking bigger risks, then they should stay away from market-linked equity investment opportunities, as they tend to be riskier in general.
Those with a low-risk appetite can choose equity mutual funds, as they tend to give good returns with zero to no risks involved.
Also, these mutual fund investments are perfect if one does not have the expertise to understand the market nor do they have the needed time for research.
Looking for high returns
There are many investors out there, who are constantly looking for good returns for modest yields. For them, equity investments are the perfect option. Most investors are not experts regarding the equities and market in general.
For them, it is a better option to choose a reliable equity fund for the long term and ride the market volatility. This plan is quite useful for earning good returns at reduced risk levels.
Investment for Long term
One of the things that every equity investor needs to keep in mind is that they need to have patience for bigger and steadier returns.
In short term, equities tend to have large fluctuations due to volatility. But market volatility is quite common and one cannot avoid them.
Therefore, investors should avoid selling suddenly and shall wait for a longer time for the equities to gain value eventually.
Conclusion
Stock investing requires making a very thoughtful and well-researched decision. The performance of the business has a direct impact on the stock price.
Choose potential businesses that will be continuously lucrative and enable you to build your wealth over time.
Hope the above article has provided sufficient material to help you evaluate your chances of earning big profits through equity investments. Happy investing!
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