An equity investment is the amount of money that an investor invests in a firm by purchasing its shares. In this way, when anyone talks about equity investment, he/she most of the times refers to the purchase of the shares in the company’s stock traded on the stock exchange.
Those who invest in equity market buy the shares of the company with the expectation of monitory gain. However, an investor is able to get benefits only when the company wherein one has invested gets capital appreciation.
Benefits of Investing in Equity
The benefits that an investor gets from investing in equity are:
- Capital Gain: The main benefit of investing in equity fund is the chances of increment of the principal amount that is invested. This means investment in equity increases the chances of capital gains.
- Dividend: The investors are able to get the dividend through the company wherein the money is invested. In this way, it is one of the two main sources of return through which the investment is made.
- Lesser Liabilities: In this kind of investment, the liabilities on the investors are not much. It is limited to only the extent of the investment that is made. This means, if the company in which an investor is invested goes in the loss, then the share of the loss above and over the capital investment is not borne by the investor.
- Owner of Income and Assets of the Company: The one who invests in equity on a company also becomes an owner as he/she becomes the owner of the assets of the company. In addition to this, the investor also becomes eligible to share the income of the organization. He/she gets some part of the income as divided in the form of cash and the remaining part is invested again in the company.
- Exercise Ownership: By investing in the equity of the company, the shareholders become the owner and hence exercise the ownership of the company. In this way, an investor gets the right to vote in the company.
These are some of the benefits that an investor gets by investing in the equity of the company. With benefits equity investment also has some disadvantages, which are:
- High-Risk Investment: It is one of the riskiest investments if we compare it with any other forms of investment such as debts. The money an investor invests in this form of investment is as per his/her faith in the company.
- No Fixed Dividend: The divided that an investor gets is not fixed. It is the management who decides how much money should be given as dividend. Most of the companies do not give dividend in case of loss, however, in the case of profit the dividend is decided as per the Boards of Directors.
- Variation in the Equity Market Price: The market price of any equity varies widely. It is difficult to predict whether equity will be profitable or will go in loss.
Let us now discuss the types of equity investments:
Equity Investments Types
Equity investment is not a single type of investment instead it has variations and types, which are:
- Equity Linked Savings Scheme: It is more commonly known as ELSS. It is a tax saving equity type wherein funds have a very diversified portfolio. The fund manager invests in the stock market. This investment type has the smallest lock-in period, which is only for three years.
- Equity Diversified: As per the name of these equity funds, they invest across various sectors. However, investors should also see the market cap.
- Sector Funds: Sector funds invest in the single sector only, like in financial services, FMCG, healthcare, etc.
- Hybrids: These are the most profitable type of equity fund wherein the money is invested in both equities and debt instruments.
- Global Funds: The equity funds that are invested in the global market are known as global funds. For example, the energy fund invests in the global energy market.
Who Should Invest in the Equity Market?
There are two main characteristics of an equity investor, which are:
- Ability to Take Risks: Those who are ready to take a risk can invest in the equity market. Without the power to tolerate risks, one cannot become a successful equity investor.
- Long Term Investor: The next characteristic of an equity investor is the ability to keep investing for the long term. Those who can invest their money for at least five years should invest in equity. This is because the gain in this type of investment can only be seen when one stays in the investment for a longer period of time.
Equity investment is proven as one of the highest growth investment option if the money is invested for the long term. While there are many benefits associated with it, there are risks involved as well. Risks in money market directly impact the equity investment. The equity rise and falls according to the forces of the market. So, keeping an eye on market trend is necessary. And write here for any kind of investment queries.