Making Money Through Equity Investment

Nutan Gupta

02 Aug 2017

‘Equity Investment’ refers to the buying and holding of shares of public companies, such as those traded in Bombay Stock Exchange. By the action of buying ‘shares’, the investor becomes a part owner of the company. This brings a lot of benefits; and they are, voting rights to appoint the management, a share in profits and probable preference on new shares of the same company.

Equity is one of the few ways of making a big sum of money. Preferably for investors with relatively high risk appetite, equity is designed for individuals or firms who wants to play the ‘high risk, high return’ game. This is because it comes with the risk of losing the entire capital.
Investing in stocks has to be a very informed and researched decision. The price of the stock is directly linked to the performance of the company. Hence, it is important to choose the promising companies that will be consistently profitable, giving you growth through the years.

Untitled12
Fig 1: SENSEX through the years
The above graph indicates the yearly growth of SENSEX from 1981 to 2016. We can see that the index has been gradually giving great returns to the investors.

As stated before; upon purchasing a stock, an investor becomes a proportional owner of the company based on how many shares of stock have been purchased. There are 5 different ways for the investors to make money from an equity investment:

Dividend:
As an owner, the investor is entitled to a share in the profits of the company. If the company chooses to distribute these profits through dividend, the investor earns a specific amount for every share he owns.

Capital Gains:
An increase in the market price of the stock, benefits the investor since he/she can make profits from the sale of the holdings. Over the course of years, an investor may make more than 50 times of what he has invested.

Buy Back:
The company may declare to buy shares from it’s shareholders at a price higher than the market rate. Although not every investor wishes to sell shares, one can make an extra profit through the buyback window.

Rights Issue:
On the issue of new shares, the company may give a discount to its existing shareholders. The investor can make profits by purchasing shares at a discounted price and selling them at a higher market price.

Bonus Issue:
If a company is performing exceptionally well, it might give free shares to its shareholders. These additional shares soon starts trading at market prices, giving an excellent opportunity to the investor to make profits.

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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Making Money Through Equity Investment

Nutan Gupta

02 Aug 2017

‘Equity Investment’ refers to the buying and holding of shares of public companies, such as those traded in Bombay Stock Exchange. By the action of buying ‘shares’, the investor becomes a part owner of the company. This brings a lot of benefits; and they are, voting rights to appoint the management, a share in profits and probable preference on new shares of the same company.

Equity is one of the few ways of making a big sum of money. Preferably for investors with relatively high risk appetite, equity is designed for individuals or firms who wants to play the ‘high risk, high return’ game. This is because it comes with the risk of losing the entire capital.
Investing in stocks has to be a very informed and researched decision. The price of the stock is directly linked to the performance of the company. Hence, it is important to choose the promising companies that will be consistently profitable, giving you growth through the years.

Untitled12
Fig 1: SENSEX through the years
The above graph indicates the yearly growth of SENSEX from 1981 to 2016. We can see that the index has been gradually giving great returns to the investors.

As stated before; upon purchasing a stock, an investor becomes a proportional owner of the company based on how many shares of stock have been purchased. There are 5 different ways for the investors to make money from an equity investment:

Dividend:
As an owner, the investor is entitled to a share in the profits of the company. If the company chooses to distribute these profits through dividend, the investor earns a specific amount for every share he owns.

Capital Gains:
An increase in the market price of the stock, benefits the investor since he/she can make profits from the sale of the holdings. Over the course of years, an investor may make more than 50 times of what he has invested.

Buy Back:
The company may declare to buy shares from it’s shareholders at a price higher than the market rate. Although not every investor wishes to sell shares, one can make an extra profit through the buyback window.

Rights Issue:
On the issue of new shares, the company may give a discount to its existing shareholders. The investor can make profits by purchasing shares at a discounted price and selling them at a higher market price.

Bonus Issue:
If a company is performing exceptionally well, it might give free shares to its shareholders. These additional shares soon starts trading at market prices, giving an excellent opportunity to the investor to make profits.

Have Referral Code?