What is equity? It may sound like a very basic question but it actually is not. I have always found investors looking for or making equity investments, just with a view that stock markets are rising, which is a wrong way to make investments.
Though stock markets help in making out the valuation of a stock but seeing equity investments from the stock market point of view restricts the understanding of the potential the equity investments have.
In the rising market, everyone wants to have exposure on equity investments, in the falling market every second investor shy away from equity, by calling it risky. But I have never seen this happening in Gold and Real Estate.
But if you look at the average investments in equity over a longer period of time it has beaten all other investments with a Big Margin. there is a concept called asset allocation which is important to follow especially in goal based investments.
What is equity?
The word equity comes from Equality. In investment terms we call it Equity share. “A share means a Portion of something, so equity share is a portion of ownership in a company.” An equity share investor has equal rights in the company’s profits and losses, based on the proportion of his ownership.
Equity share Investors participate in the growth and also bears the losses of the company. Debt (Loan) investors will get a pre-decided interest, but no portion of the profit.
In a business you do not start earning profits from day 1, sometimes it takes years to reach breakeven and come into profits. Unlike employees, who start earning their salary from the first month, a businessman bets on the future potential of the business. To invest and gain from equity you have to have an attitude of Employer/Entrepreneur.
When a business reaches a profitable stage and has regular multi-year profits and good numbers to show to the investors, they try to go public by listing their shares on the stock market.
Without valuing the long-term potential of the business, without knowing what actually the business is, they keep reacting to different market movements, and this is the reason that Investments had given returns in the past, but Investors were not able to make money.
It is understandable that it’s not possible for everyone to get into every equity shares detail, not everyone can read balance sheets, talk to management people and make investments, which is why the financial markets has other instruments like Mutual funds where you can buy the professional help.
Indian economy got the required push only after 1991 when it was opened for the world. After all Hiccups of 2000, 2008, since inception Sensex has delivered 17%+ kind of CAGR returns.
What is equity – A Financial Planners’ Perspective:
When we know that we do not know what is equity, then we should not own those equity shares directly just because someone who claims to know what he also does not know, has advised you to buy that.
Do not look at equity investments as something to make quick money and that can be traded in the stock market. The stock market is just a platform to provide liquidity to the investors.
Yes, volatility will be there, and to earn from equity you have to bear the volatility, its a part of the business. If it’s not in your risk tolerance then follow an asset allocation and goal-based investment approach.
Why in Equity is also an important question to answer along with what is equity? You should not look at equity as an investment if your investment horizon is very short term.You may also use debt as a good investment tool
Nice post!I am new to stock market and your blog very helpful for us.its very knowledgeable post for me keep sharing more post like this it really helps me.
Thank you.