What is Equity?
An equity investment is a money that is invested in a company by purchasing shares of that company in the stock market. These shares are typically traded on a stock exchange. Equity investors purchase shares of a company with the expectation that they’ll rise in value in the form of capital gains, and/or generate capital dividends.
Benefits of Equity Investments
- The main benefit of an equity investment is the possibility to increase the value of the principal amount invested. This comes in the form of capital gains and dividends.
- An equity fund offers investors a diversified investment option typically for a minimum initial investment amount.
- Investors may also be able to increase investment through rights shares, should a company wish to raise additional capital in equity markets.
Risks of Investing in Equity
- If most investors believe that a particular company might suffer losses or possibly wind up in the future, then they will start selling its stocks. Therefore, there will be more sellers than buyers in the market for the said stock resulting in the supply surpassing the demand and a drop in the market price of the stock. Hence, there is a risk of losing money instead of earning returns when you invest in shares.
- A company’s value could drop because it’s too concentrated in a single entity, sector or country. If the value of that factor drops, the company will get hurt disproportionately.
- A company’s returns could suffer because of a country’s political changes or instability.
How to Start Investing?
As an investor, it is important to look at equity shares as an asset class rather than an investment instrument. Investing directly in shares requires a detailed research of the fundamentals and financials of the company. This requires time and a fair understanding of the financial markets too. So before you go ahead, make sure you understand the basics and invest according to your investment profile.
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