I am sure the first thing that came to your mind when you heard the word ‘Equity Investments’ was The Wolf of Wall Street, wasn’t it?
Well, the equity investment is not that simple same way isn’t that difficult.
Equity investing is known as a zero-sum game; some also call it gambling. Some dislike investing because there is no “guarantee” of returns. But some simply enjoy it without even understanding it.
Investing in equities is neither of these two extremes. Mindless trading based on luck will not be profitable over a long period of time and barring equity investments from the portfolio will lead to a large amount of opportunity loss. So, the question is what should an ordinary investor know about investments in equity?
Below are your answers –
- Investing in equity means investing in the future of the company whose shares you are purchasing. Of course, no one can predict the future that’s why investments in equity are said to be challenging, risky and thrilling.
- You may have heard a lot of stories about how an investor became a millionaire by investing in one stock. Well, this is just one part of the story. An actual investor will only be able to tell you how the bumpy ride was and how many times they thought that they should quit the investment. For one success story, there are a hundred failures. No one pays for doing nothing.
3. The art of picking a stock is not very easy. The factors relevant today cannot be relevant tomorrow. These skills are mastered by individuals who spend a lot of time, in fact, years analyzing the stock. These individuals are also not a hundred percent sure but have experience which guides them
4. Buying stocks is a tough decision to make. There are a lot of approaches defined to pick the right stock but not every approach is suitable for each individual. Before buying a stock an investor needs to have the right investment thesis.
5. It can be said that an ordinary investor may be deprived of the right information at the right time. That’s why there are broking houses that charge fees/commissions and have the required manpower and research tools to do so. There are also mutual funds who are available to all types of investors and are run by an expert. If the investor does not want to opt for any of these options then they should form a group and discuss their research and findings.
6. Having multiple stocks in your portfolio not necessarily mean you are going to be rich. A well-diversified equity portfolio is important which will help increase returns and diversify risks
“Mutual Funds are subject to market risk. Please read all the offer documents carefully before investing”
Does this disclaimer sound familiar? Well, this precisely sums up equity investments. In the past equity investments are known to give the maximum return among all the investing types. But for investors to earn that return, high risk needs to be taken. Let us take look at types of risks that are associated with equity investment –
Market Risk
Market risk is incurring losses because of all the market factors. Factors like economic slowdown or the current trade war leading to a volatile economy. Market risk cannot be controlled and it is only up to a particular limit that we can control this risk utilizing diversification.
Liquidity Risk
Liquidity is when investors can redeem the shares as per their wish and at a fair price in the market. In the case of liquidity, risk investors are forced to sell the shares at a lower price than the fair market price. To avoid liquidity risk various mutual funds offer the option of investing some portion of their amount in liquid funds.
Social and Political changes
Any type of political change may have an impact on the fund’s performance. For example, when recently the US implemented additional tariffs on China the exports from China to the US decreased dramatically and increased the chances of the US’s export business with India. Also when the tax rate cut for all corporate companies was announced. The market hit an all-time high. Such events have a strong impact on the entire economy and the market.
Who should invest in equities?
Investing in equities is a worthwhile option for investors who have the ability and willingness to take the risk. For risk-averse investors products that are linked to the market may not be the best suitable option and for risk-seeking investors, the small-cap may be the perfect option. Investors should also consider the time horizon that they should be invested in. The longer the period the better the return.
Before investing in equities, the investors must think about their goals, willingness, ability and time horizon.
Types of Equity Investments
- Shares – Shares are traded on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) if they are publicly listed companies. Shares are impacted by all the external factors as listed above and all the internal factors like the performance of the company and sector performance
- Equity Mutual Funds – A mutual fund is essentially buying shares by a pool of investors and are meant for investors with limited time and knowledge
- Other options include futures and options, arbitrage schemes and alternative funds.
Conclusion
The wealthiest individuals are equity investors. You should not be left behind just because you are not aware of particular things. Investing in equities is a fair, democratic and efficient opportunity for all. It is important that each investor understands their goals, abilities, and willingness before taking any kind of risk. So, don’t wait for names and invest your time in finding the right stock!
Read more: Financial Modelling Certification – A Door Opener for Analysts in India
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