Also referred to as shareholder’s equity or owner’s equity (in the case of privately held organisations), equity denotes the sum of money that the shareholders would receive if a company’s assets are liquidated and its debt is entirely paid off. In scenarios involving acquisitions, it represents the value of company revenue, excluding liabilities owed. In this article, we will discuss some of the key advantages of equity investments.
Additional read: Equity (ROE)
Why consider investing in equities?
If you are focused on long-term growth and can tolerate a certain level of risk, investing in equities can be an excellent fiscal solution. As compared to financial instruments like bonds, they render higher returns. Additionally, equities can help you save up for retirement or any big-ticket expenditures in the future. They can come in handy while dealing with inflation and allow you to distribute your wealth across industries to manage risks.
But before you commit money to any stock, research the company fundamentals and assess the market conditions. You could consult a financial advisor who could assist in customising your investment portfolio based on your goals and risk appetite.
Understanding the benefits of equity
Here is a list of some key advantages of equity investments.
Ownership and voting privileges: As an equity investor, you become a partial owner of the business you invest in. This ownership comes with perks like voting rights, enabling you to participate in pivotal company decisions such as electing the board of directors.
Returns: When the stock price of a company soars, you will receive returns in the form of capital gains. Besides profit from asset appreciation, certain businesses also share dividends, a type of routine disbursal. However, please note that dividends are optional, which means not all companies provide such periodic payments.
Liquidity: As equities are traded on stock markets, they offer liquidity. This simply means you can easily purchase or sell stock as per your convenience. Moreover, this feature gives you the control and flexibility to adjust your investments depending on the fluctuating market conditions. So, you can advantageously add or remove securities to optimise your capital gains.
Defence against inflation: Equities have exhibited an ability to defy the effects of inflation. Investing in shares can be a smart manoeuvre to retain and appreciate the value of your funds in the long run.
Limited liability: Your liability is limited to the extent of the investment you have made in the business. If the concerned company experiences a loss that is more than your investment value, you will not be held responsible for it.
Additional shares: For an existing shareholder, some companies could issue bonus shares. These are free shares that get added to your portfolio. Similarly, at times, businesses could also split their stocks. This reduces the share price without affecting your capital holding. Split stock can help amplify the liquidity of your shares.
Diversification: A major advantage of equity is that it allows you to invest in different companies across numerous sectors. Such diversification can mitigate the overall risk of your portfolio.
Tax benefits: Investing in equities also means you get access to several tax benefits. As compared to other economies, capital gains on stocks in India are taxed at a much lower rate. Additionally, there is no lock-in period mandate for equity shares concerning tax purposes.
Loan collateral: Your equity investments can also be employed as collateral if you want to borrow money from a bank. These stocks demonstrate the creditworthiness of a company and help you secure speedy approvals for loans.
Undoubtedly, there are several benefits of investing in equity, but they come with some inherent risks. For example, they are highly volatile as their valuation is directly based on price movements of the markets and economic circumstances. Such volatility could result in short-term price oscillations. Similarly, in several short-term conditions, there is a risk of loss. Before you join the equity bandwagon, it is highly recommended to ace your homework about the companies’ finances you are interested in, the current market trends, and the growth potential of various sectors.
Additional read: Debt-to-equity ratio
Closing thoughts
There are multiple advantages of equity investments, and they should be a part of your wealth management strategy if you are seeking long-term gains. While higher returns and advanced liquidity make them attractive, it is important to realise that equities are innately volatile. To make lucrative rewards from your investments, you should pay attention to some key aspects like the financial health of the company, sector performance, market climate, and economic headlines. Lastly, you have to accept that equities come with specific risks, which might create ripples every now and then. When you start your investment journey, ensure to stay on top of market predictions and tailor your trading strategies on a regular basis to cut losses and increase capital gains.
