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Equity is a type of share/stock that represents interest or share in a company. Hence when you own a company’s share, you are part owner of that company. Equity is also called shareholders equity.
There are mainly two equity investment options: equity shares and equity mutual funds. Other options include private equity, which includes venture capital.
How can I begin investing in equities?
Before starting investing you need to open a Demat account. You can open a Demat account from here or with a brokerage firm to invest in the stock market.
Or you can approach a financial advisor who will guide you on what to buy, and then purchase the funds for you. Another option is to equity funds from a fund house directly. For all of the above, you will first need to complete KYC (Know Your Customer) verification.
Types of Equity
Equity investment does not come with the assurance of giving fixed returns. Returns usually depend upon an asset’s performance.
Equity investment can be divided into several categories and each category has its own risk and rewards.
Following is a broad categorization of equity investments –
- Equity Mutual Fund Investments
When capital/money from various investors is collected and then invested in various equity is known as equity mutual funds. Equity mutual funds are those options whereby at least 60% of the total assets are invested in the equity shares of different companies.
Further, based on capitalization, equity mutual funds can be divided into the following categories.
- Large-cap equity funds
These types of investments can be done with large and well-established companies as these have the potential to provide stable returns at low risk.
- Mid-cap equity funds
This type of investment is done with mid-cap companies as they provide the most beneficial investment options by providing a risk-reward ratio in a well-balanced way.
- Small-cap equity funds
These are mutual funds invested in the shares of companies that have small market capitalization and are comparatively more volatile than other categories of diversified funds.
What are the risks of investing in equities and how to lower the risk?
The biggest risk of investing in equities is that the price of your holding can fall. Thus, if you sell at that time, you incur a loss.
However, if you are a long-term investor, this risk becomes lower. Try to invest for the long term. Do not panic when the market or your share or fund price dips. Diversify your portfolio. Hold shares of different types of companies across industries.
Invest in funds that are exclusively equity and also have a mix of equity and debt.
Advantages of Equity Shares
Some of the benefits that can be enjoyed by investing in equity shares are listed below:
- High returns
Investing in equity shares provides high returns to investors. Shareholders have an opportunity to enjoy wealth creation, not just through dividend earnings but also through capital appreciation.
- Ease of investment
Investing in shares is simple. Investors can avail of the services of a stockbroker or financial planner to invest through various stock exchanges in a country. If an individual has set up a Demat account, he/she can buy the stocks in a few minutes.
Disadvantages of Investing in Equities
Even though equity investments have their fair share of advantages, they also bear a few disadvantages. Some of them are as follows.
- High market risk
Investing in equity shares can yield returns but also exposes investors to high risk as compared to other investment options like debt instruments. An investor can risk losing his/her entire investment corpus by investing in equity shares.
- Risk of inflation
A company’s worth can get diluted due to rising inflation and subsequently, its shares might not generate potential returns.
- Liquidity risk
Due to liquidity risk, investors might have to sell their shares at a much lower price than their fair market value. Liquidity risk arises when a company is unable to meet its debt obligations in the short term.
- Risks arising out of social and political changes
On-going social and political issues in a country can hamper the growth of a business. For example, if a government decides to promote indigenous businesses, it might restrict the entry of foreign businesses into the country.
FAQs
When you hear the term “equity” in relation to investing, it usually means one of three things:
- Shares of stock that an investor owns.
- The total shareholder equity in a particular company.
- The alternative ownership structure of private equity.
For most retail investors, the two main equity investment options are equity shares and equity mutual funds.
Other options include private equity, which includes venture capital.
The biggest risk of investing in equities is that the price of your holding can fall. Thus, if you sell at that time, you incur a loss. However, if you are a long-term investor, this risk becomes lower.