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. We believe this blog helps you 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. Shareholders’ total shareholding is divided into shares, which have a fixed value and can be traded for profit or loss on a stock exchange or other financial markets.
Each shareholder will receive shares in proportion to their initial investment. Various factors determine the value of these shares. They are company’s performance, its track record, and its assets and liabilities. However, the most important factor is the market forces of supply and demand.
Equity shares grant holders the right to vote on various corporate matters, including board director elections and stock dividend payments. By investing in renowned companies like Tata and Reliance, you’re essentially buying a piece of ownership in that company. You get to share in the company’s profits and your share value grows along with the company’s success. Moreover, your share represents a proportional claim to the company’s assets. As a shareholder, you also have a say in important company decisions. They appoint board directors, chartered accountants, and approve past accounting records.
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)
2. 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.
“The SEBI establishes strict regulations and policies that companies must follow to attract investments and become listed. Once the company meets the regulations, it can opt for an initial public offering (IPO) and offer its shares to the public.”This is where the general public can invest in the company for the first time, sometimes at discounted prices.
After they are issued, shares can be bought and sold in a market called a stock exchange.
After issuance, buyers can purchase and sellers can sell shares in a market known as 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!
Investing in equity shares also comes with the benefit of liquidity. It means there are many buyers willing to purchase your shares at any given time. If you want to sell your shares, you can do so at any time without the hassle of finding a suitable buyer. You have the freedom to sell your shares whenever you want.
Investing in equity shares of highly reputable companies has historically been the most profitable way to invest money. Significant returns can be achieved by staying invested for a considerable period of time.
The advantages and disadvantages of investing in Equity Shares
As with any investment, there are advantages and disadvantages.
The equity shares 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). To understand the state of your investments, you must monitor the stock market regularly since the returns are not guaranteed.
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. If you’re 44, only 56% of your holdings should be in equity shares.
Equity shares are an excellent way to start building wealth. This is an important point to remember when deciding whether or not to invest in them. 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!