Before we get into the excellent reasons to invest in equity, let us first understand that the term can have different meanings depending on the context and type of assets. In general terms, equity means to hold your asset after all the debts associated with it have been paid off.
In simpler terms, equity is nothing but ownership. For example, when you buy 10 shares of a company which has 100 shares in total, you are buying part ownership of the company, which is known as an equity investment. Those 10 shares will make you 10 per cent owner of the company. Now, if the company makes a profit, your initial capital investment will rise.
Advantages of Equity Shares
The share market has always been a great investment avenue. It has helped make fortunes in a single lifetime. Investors save up and invest their hard-earned money in equities to earn potential capital returns. It is always advisable to invest in equity shares for the long term if one wants to build wealth over a period. Therefore, each investor looks at different perspectives and investments to maximize their potential returns.
Let us take a look at the 13 benefits of investing in equity shares:
Opportunities for Profit
Equities have always had the potential to fetch good returns in the long run. For example, if one had invested ₹55,000 in Eicher stocks instead of buying a Royal Enfield bike in 2001 when the share price was ₹3, today that investment would be worth 8 crores.
Investment returns that can tackle inflation
Equities have the potential to give returns that can tackle inflation. Every year inflation keeps rising and people lose their financial ability to buy products. For example, if you buy an apple for ₹50 and a year later the apple’s price increases to ₹100. Now, your power to purchase the apples has decreased. Now if you had invested ₹50 and are able to profit ₹100 in returns, you gain the power to tackle the inflation.
A dividend income is an income that the company distributes to their shareholders out of the company profits. The dividend acts as an important source of income for the shareholders of the company. It is simple to say that dividends are one way that investors earn their returns from investments. The rate of dividends differs from company to company. Most long term investors prefer to invest long-term in companies that have a good reputation for distributing dividends with consistent record profits.
When you invest in a company, you get the voting rights to make key decisions. Therefore, with the purchase of shares of the company, one exercises control and gets part ownership of the company. You also get to participate in shareholder meetings and other important meetings within the company.
Ownership over assets and income
When you buy shares in a company, you get part ownership of the company and the assets that the company owns. They indirectly benefit you when the company’s share price increases over time, when the company makes record-breaking profits.
Diversification of Portfolio
Equity shares provide investors with the opportunity to diversify their portfolios. Diversification helps the portfolio in risk management, which protects investors from the volatile fluctuations in the stock market. For example, having multiple investments reduces the risk factor. If you have multiple investments in your portfolio and one investment is taking heavy losses, your other investment may be outperforming, making up for the losses.
Many times companies decide to give out bonus shares to their shareholders. Bonus shares are a type of dividend that is given to shareholders for free. On numerous occasions, bonus shares are given instead of dividends. For example, you have 100 shares of a company that is trading in ₹1200. Now, if the company allocates bonus shares in the ratio of 10:1, then you get additional 10 shares. This means your initial investment of ₹120,000 becomes ₹132,000, which is an added profit of ₹12,000. Now, if in a couple of months the share price increases to ₹1500. Your investment could be at ₹165,000.
Whenever the company needs further capital for expansion or any other business use, the company issues the right shares. Right shares are those shares that are offered to the existing shareholders of the company. This is because current shareholders have priority over the other general investors during the issue of the right of shares. Right shares are issued at a price that is lower than the current market price of the stock. Therefore, existing shareholders benefit from purchasing the shares at a lower price.
A stock split is another advantage of equity. Stock split means shares are split into parts that reduce the price of the shares. This leads to investors having a higher attraction for the shares. The reduction of the share price makes the stock price even more liquid and higher volumes lead to a spike in the price if the company is performing well. Hence, the stock splits prove to be beneficial to investors in the long term.
Liquidity is one of the main benefits of investing in equity. Liquidity means the volume of shares being traded in the stock market. When you buy shares of a company, you have the option to sell at anytime. This availability to purchase your stocks during the market session makes the equity market appealing. Therefore, if in need of urgent cash, you can easily sell your stocks on the exchange and get the money credited to your bank account.
Share in Growth
One of the best parts of investing in the equity of the company is that you are the shareholder in the company and you get the opportunity to witness the growth of the company from the ground up. It is a wonderful experience to see the company reach glory starting from the bottom. For that growth, you are rewarded fairly in appreciation of the share price.
Investing in equity has several tax benefits. The capital gains on equity shares are taxed much lower when compared to other countries. There are two types of tax levied based on the time you stay invested: Long-term capital gains (LTCG) and Short-term capital gains (STCG). According to the changes made in 2018, any investment above 1 lakh for LTCG is taxed at 10% without tax benefits. STCG it is taxed at 15% with tax benefits.
The equity shareholder has the right to claim on the assets and income of the company in certain suitable situations. This claim can be made on those assets or income that are left after paying all the stakeholders such as debenture holders and lenders. This is a major advantage if the company goes under. This is because you can still lay claim to something from the company and get the amount of your investment back, instead of suffering a loss with the company.
Share markets are always volatile. You should prepare yourself better for this fact and not get affected by the regular price fluctuations. Returns can vary from stock to stock. One stock can give you returns and others may run you into losses. To overcome this, you must be selective and choose stocks after doing your research. It is important to keep yourself updated with the trends in the stock market and regularly monitor your portfolio. These are the very tips that one should keep in mind before investing in equity.
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