Interest rates offered by banks on FDs (fixed deposits) are declining steadily. The constant returns on fixed deposits are not particularly enticing to ordinary investors. Retail investors are learning that in order to build long-term wealth, they must invest in equities. Diversified equity funds are regularly surpassing other investments in terms of returns. The higher risks associated with other forms of investment and the high returns on equities make equity investment a better option.
Hence, you should search for the best demat account and start your investment. For your convenience, we have prepared a guide that includes all aspects of equity investment ranging from the definition and types of equity to the procedure of equity investment.
What is Equity Investment?
In equity investment, you can invest your money directly in companies by buying their shares in the stock market. This way, you can hold ownership of the company and gain profit from the company’s growth.
Equity in the context of finance refers to ownership of assets with potential obligations such as debts. For accounting reasons, equity is calculated by deducting liabilities from the value of the assets.
The most common type of equity investment are:
- Common Shares: This is the most popular type of equity investment. You can invest in companies through the stock market and get a share of the profit/loss of the business. Shareholders have voting rights as well.
- Equity Mutual Funds: It is a pool of mutual funds. Based on market capitalisation, funds are divided into large, mid, and small caps.
- Preferred Shares: These are similar to common shares without voting rights, and companies pay annual dividends.
- Retained Earning: The business keeps some of the dividend distributions after issuing them for potential future investments. They are listed as part of shareholder equity.
- Private Equity: It is for high-net-worth people. These investors fund private firms directly before stock exchange listings.
Investors buy shares with the hope that their stock value will rise either in the form of capital gains or capital dividends. If the value of an equity investment increases, the investor will receive profit either by selling their shares or by the company liquidating its assets and paying all of its debts. Additionally, equities add diversification to a portfolio and improve asset allocation by reducing risk.
How to Invest in Equities Safely
You can invest in equities majorly in these two ways: directly in companies’ stocks or in mutual funds. Follow this simple four-step process to invest in equities:
- Step 1: Choose your broker for free demat account opening. Register for your demat account by submitting mandatory documents such as an Aadhar card, PAN (Permanent Account Number), and bank details.
- Step 2: After successful verification, you can create your password. Log into your trading account and choose the shares you want to buy.
- Step 3: Select the price point, and wait for approval of your request from the seller.
- Step 4: Once put and call price match, you can buy shares and complete the transaction.
All transactions will show in your account, and you can monitor your portfolio performance by logging into your account anytime.
Types of Risk Associated With Equity Investment
Market risks significantly impact stock investments as market forces frequently alter stocks’ value. As a result, the market risk becomes an essential element for investors which puts them in danger of losing some or all of their investments. Additional significant risk categories of equity investment include:
- Credit risk: A business’s inability to pay its debts.
- Foreign exchange risk: Drastic changes in the value of international currencies could affect a company’s worth.
- Risk of liquidity: A business might have trouble paying its short-term debt obligations, hence declining the worth of investment.
- Risk of Company’s wrong strategy: If any business solely relies on a single entity, or plan, chances of high-profit value may decline. The companies should diversify their allocations.
Unsurprisingly, investing in equity funds is among the best investment options as it accommodates a broad range of investors and shares. Additionally, Systematic Investment Plans (SIPs) allow you to invest in equity funds in lump sums and on a recurring basis. SIPs let you make small, easy-on-the-budget monthly payments starting at just Rs. 500. I hope this information will help you with proper investment.