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All about Equity

What is equity fund?

Equity or shares are instruments companies issue to raise funds for their growth. Investors buy these kinds of equity investment such as shares because they expect the value of these shares to increase as the company grows with the help of their funds.
Equity shares give you ownership rights in the company. In other words, if you buy a company’s shares, you become one of its owners. However, your ownership interest is extremely small because you own a very small percentage of shares. Nonetheless, your shares give you the right to vote in all important matters of the company. They also entitle you to a share in the company’s profits.



How to buy shares?


There are two markets where you can buy shares – primary and secondary. The Primary market comprises all transactions in which the company directly (i.e. through an agent) offers its shares to general investors. The first time a company does so is called its initial public offer (IPO). All subsequent offers are called follow-on public offers (FPOs). You can bid for IPO and FPO shares through your demat account.
A company’s shares get listed on a stock exchange soon after its IPO. From here on, you can buy and sell them on the stock market. All buy and sell transactions on the stock market are called secondary market transactions. Exchanges act as an intermediary between the buyer and the seller for these transactions.



Equity mutual funds


Active stock trading is a skilled full-time job. If you don’t have the time to master it, invest in top equity mutual funds and let the experts do it for you. There are many good fund houses that have plans for every investment objective. They are managed by highly trained investment professionals with years of stock picking experience.



Types of equity returns


Shares generate returns in two ways – price returns and dividends.

Price return is the profit you make when your stock’s price increases. Share prices increase when a company performs well. So, when buying shares, you are essentially betting on the company’s performance.

As discussed earlier, shares give you ownership rights in the business and entitle you to a share in its profits. Companies retain most of their profits and spend them on future growth. But they also distribute a part of them to shareholders. This is known as dividend. Dividends are typically announced on a per share bases. So, if you have 100 shares of a company that has announced a dividend of Rs.5 per share, your total dividend will be Rs.500.

It is not compulsory for companies to pay a dividend. They can pay a different amount each year or not pay anything at all.



Analysing equity returns


Price appreciation and dividend returns vary from company to company. For a better analysis, you should look at their sum, i.e. total return. Young companies generally don’t pay high dividends because they need to invest in growth. However, they generate great price returns because of their strong growth potential. Mature companies generate moderate price returns because they have limited investment opportunities. However, they can pay higher dividends because they are cash rich.



Equity risk


Equity investments are highly susceptible to market developments. Also, they don’t guarantee a fixed return like bonds. This makes them high-risk investments.
A proportion of this risk is stock-specific or unsystematic. For example, internal labor issues will only affect the shares of the company that is facing them. You can easily mitigate this risk by investing in other companies. Other risks affect most companies and are hard to mitigate. For example, if a country is at war, stocks of most companies in it will be affected. You cannot mitigate this risk by investing in other stocks. Such risks are called systematic or non-diversifiable risks.
Don’t let systematic risks bother you because you cannot do much about them. Try to reduce your unsystematic risk as far as possible by building a portfolio that has shares of several companies from different sectors.


 

In Conclusion

Now that you have a firm grip on the basics of investment in equities, you are all set to start trading. Remember, stock trading is risky, but risk and return go hand in hand. So, pick your stocks wisely and leverage the expertise of professional investors by including equity mutual funds in your portfolio.


Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.