One of the most important instruments created in the financial world – equity shares – are often a topic of confusion to young adults, especially with all the jargon surrounding the financial world. Considering that there’s a significant possibility of losing real money – the mindset surrounding equity shares in India hasn’t been the greatest.
In this blog post, we will take you through the ABCs of Equity shares, allowing you to make an informed decision for yourself, on whether or not you should invest in equity shares.
Equity shares represent ownership in a company.
Equity shares represent ownership in a company, measured in terms of its equity capital. The shareholders’ total shareholding is divided into units called shares which have a fixed value. The value of these shares can be traded on a stock exchange or other financial markets for profit or loss.
Each shareholder will receive shares proportional to the amount initially invested, the value of which will be determined by many forces, including the performance of the company, its track record, the assets and liabilities it holds., and more importantly – the market forces of supply and demand.
Each equity share entitles its holder to vote on matters affecting the corporation, such as board director elections, stock splits and stock dividend payments.When you invest in famous companies like Tata, and Reliance – what you’re really doing is purchasing a piece of ownership from that company. You get to partake in the profits of the company, the value of your shares grows along with the company, and your share lays a proportional claim to the assets of the company. You also get to have a say in important company matters, like appointment of board of directors, chartered accountants, spinning off of new divisions, or even approving the books of accounts from the last years.
The process through which the company offers shares to the public is called the initial public offering (IPO).
There are two types of companies, that you need to know when it comes to investing in equity shares
Shares that are listed on the stock exchange (Listed Companies)
Shares that are not listed on the stock exchange (Unlisted Companies)
Buying and selling shares of the companies listed on the stock exchange is extremely easy – all you need is a demat and trading account opened with the institution of your choice, and enough money to actually purchase the desired amount of shares, and you’re good to go. The shares of unlisted companies, on the other hand, are not easily accessible, and not everyone can invest in them. You’ve to be invited from within the company for a private placement to even have the opportunity to invest in the unlisted companies.
For companies to get listed, and avail the privilege of getting literally anyone to invest in it, they need to undergo strict regulations and policies laid down by the Securities and Exchange Board of India. Once the regulations are met, the company can choose to get listed, and offer its share to the public for the first time. This process is called initial public offering – where the general public gets to invest in companies for the very first time, often at discounted prices.
After they are issued, shares can be bought and sold in a market called a stock exchange.
After they are issued, shares can be bought and sold in a market called a stock exchange. The stock exchange is where you go to buy or sell your equity shares. It’s also where you find out about new information about your company—like its latest earnings report or news about its products—that may affect the price of the stock.
We will talk about the stock exchange later in another post altogether.
Investing in Equity Shares – Why
Investing in Equity Shares is a great way to grow your wealth. It’s an easy way to invest, and it has many benefits. The first benefit is that you can buy equity shares online or through a broker. This means that you do not have to sit down at an actual stock exchange and trade the shares yourself; instead, you just sign up for an account with your bank or broker, put money into it and then let them do the work for you!
Another benefit of investing in equity shares is that they’re liquid—that means there are plenty of buyers willing to buy your investment at any given time. If you want out of your position, at any time, you can simply sell the shares whenever you feel like it, and you don’t have to go through the loops of finding the right buyer.
Historically, investing in equity shares, especially of highly reputable companies, have been the most profitable way to invest money, with significant results, provided that you stay invested for a significant amount of time.
The advantages and disadvantages of investing in Equity Shares
As with any investment, there are advantages and disadvantages.
The most obvious advantage of investing in equity shares is that it allows you to invest your money in a company. This means that if the company does well, the value of your investment will increase over time as well. The disadvantage is that there’s no guarantee that this will happen—and if it doesn’t happen, then your loss will be proportionally greater than if you had invested elsewhere (such as real estate).
Another benefit of investing in equity shares is that they tend to have higher returns than other types of investments like bonds and cash equivalents (money market funds). Again, these returns aren’t guaranteed, and you will need to monitor the stock market pretty regularly to understand the state of your investments.
Should you be investing in Equity Shares?
Equity shares are a great way to invest, but it’s important that you know what you are investing in. If you have never invested before and don’t understand the risks involved, then this is not the best way for you to start out. Starting out with Index Funds, Actively Managed mutual funds, or even smallcases would be a great way to begin your journey. You should do your research first and only invest what you can afford to lose.
However, as a young person, you have a lot of time to stay in the market, enabling you to make up for any losses you might face early on in your investing journey. This allows you to take much more risk, and invest a higher proportion of your money in equity shares, than you would, when you’re say 40 or 50 years old.
There’s a commonly used rule in the world of investing. Subtract your age by 100, and that’s the percentage of your investments that should go into equity shares. If you’re 22, then 78% of your holdings should be in equity shares, and if you’re 44, only 56% of your holdings should be in equity shares.
The key point to remember when deciding whether or not to invest in equity shares is that they are a great way to get started on your path towards building wealth. But don’t forget, these aren’t the only options available! In future editions of ABCs of finance, we will be taking you through all the other available options that will help you grow your money on a regular basis. Want to see more like this? Sign up for the newsletter, and get more blogs like this delivered to you in your mailbox!