Equity is a hot topic in the investment world. Whether you’re a seasoned investor or just starting out, it’s important to understand what equity is and how it works.
In this blog, we’ll take a deep dive into equity and equity investments. We’ll cover everything from the basics of equity to the different types of equity investments available. By the end of this blog, you’ll have a solid understanding of equity and be able to make informed investment decisions.
What is Equity?
Let’s begin with an everyday example. Suppose you buy a house for ₹2 Crore. You pay ₹50 Lakhs upfront and take a home loan for the remaining ₹1.5 Crore. In this case, your equity in the house is ₹50 Lakhs – the part of the house you truly own.
In a business context, equity refers to ownership as well. If a company is valued at ₹10 Crore and you own 10% of the company’s shares, your equity in the company is ₹1 Crore.
What is Equity Investment?
Equity investment is when you purchase shares of a company, thereby becoming a part-owner.
It’s akin to buying a slice of a large pizza, where the pizza symbolizes a company. The more slices (shares) you have, the larger your ownership (equity) in the company.
Types of Equity Investments
Equity investments can take various forms:
These are the most typical types of equity investment. When you buy common stocks, you gain voting rights in the company and may receive dividends, which are a portion of the company’s profits distributed to shareholders.
Preferred stockholders have a higher claim on the company’s earnings and assets than common stockholders. They receive dividends before common stockholders and have a fixed dividend rate.
Equity mutual funds:
These funds pool money from investors and invest it in a variety of equity securities. The pooled money is then invested by a professional fund manager into various equities based on the theme of the mutual fund.
Exchange-traded funds (ETFs):
These are similar to mutual funds, but they trade on exchanges like ordinary stocks. Nifty Bees(Based on Nifty 50 Index), Bank Bees(Based on Bank Nifty Index) are some examples of ETFs.
How Equities are Categorized?
As per SEBI, equities are categorized based on their market capitalisation (the total market value of a company’s outstanding shares) into three categories-
Large-cap stocks are the companies ranked between 1-100 amongst the listed companies based on their market capitalization in descending order across exchanges(NSE, BSE & MSEI). Reliance Industries, TCS, Infosys,etc are part of this list.
These companies are ranked between 101-250 amongst the listed companies based on their market capitalization in descending order across exchanges(NSE, BSE & MSEI). Godrej Properties, Lupin, Voltas, etc are part of this list.
The companies ranked 251st and beyond amongst the listed companies based on their market capitalization in descending order across exchanges(NSE, BSE & MSEI) are considered as smallcap companies. PVR INOX Ltd, Castrol India Ltd, etc are part of this list.
How Do Equity Investments Work?
When you invest in equity, you’re betting on the company’s future performance. If the company does well, its stock price may rise, and you could sell your shares for a profit.
Additionally, some companies pay dividends to their shareholders, providing an extra source of income.
Risks and Rewards of Equity Investments
Equity investments come with both potential rewards and risks. The reward is the potential for high returns. Historically, equities have offered higher returns than other investment types like bonds or fixed deposits.
However, the risk is that if the company doesn’t perform well, its stock price may fall, and you could lose a portion or all of your investment. Also, unlike bonds, equities don’t guarantee returns in the form of regular interest payments.
Choosing Equity Investments
Choosing where to invest requires research. You should consider factors like the company’s financial health, its competitive position, the industry it operates in, and its future growth prospects.
It’s also important to diversify your investments across different companies and sectors to spread the risk.
Managing Equity Investments
Managing equity investments involves regularly reviewing your portfolio and making adjustments as needed.
This could mean selling shares of a company if its prospects have worsened or buying more shares of a company if its prospects have improved.
Equity investment is a key component of wealth creation over the long term. While it comes with risks, understanding these risks and making informed decisions can help you reap substantial rewards.
As always, it’s important to do your own research or consult with a financial advisor before making investment decisions.
Equity represents ownership in a company, entitling you to a portion of the company’s profits and influence over its governance.
Equity investments include:
Common stock: Shares of a company, providing a claim on profits and voting rights.
Preferred stock: Shares that offer a fixed dividend and priority over common stockholders.
Equity mutual funds: Funds that pool investors’ money to invest in stocks.
Exchange-traded funds (ETFs): Similar to mutual funds but traded like stocks.
Direct stock ownership: Buying and selling individual company stocks.
Equity investments can be bought and sold through a broker. You’ll need to open a broker account to start trading.
Equity investments are subject to capital gains tax, which varies based on the duration of the investment. Short-term investments are taxed at the ordinary income rate, while long-term investments enjoy a lower rate.
The primary benefit is the potential for long-term value growth.
Equity investments involve buying company shares, essentially funding the company. The investment’s value fluctuates based on the company’s performance.
The primary risk is a decrease in investment value if the company underperforms. Equity investments can also be illiquid, making them hard to sell quickly
Consider your investment goals, risk tolerance, investment duration, and knowledge about equity investing. Consult a financial advisor if needed.