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What is Equity Investment? Is it the same as investing into stocks or shares? |
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Equity Investment means investing in shares of the company, which are listed on the stock markets. Yes, the word equity, stocks and shares are synonymous and investing into equity also means as investing in stocks or shares of the company. |
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| 2. |
What is a Company? And what are the different types of Companies in whose shares |
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investments can be made? |
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The Joint Stock Company is a legal entity whose capital is contributed by various stake holders into that company in lieu of shares allotted to them. According to the Companies Act broadly there is Private Limited, Public Ltd., and Listed Public Ltd Companies. In first two categories the public is not invited to invest into the shares of the company and hence they are closely owned company. While in third case the public is widely invited to own the shares of the company, by way of initial public offer and then they are listed on the recognized stock exchanges like Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Say for example company comes with an initial public offering of 1 crore shares of Rs.10/- each out of which an investor is allotted Rs. One lakh shares of Rs.10/- each on application being made by him in an IPO offering and hence now an investor owns 1% of the company’s capital i.e. Rs Ten lakhs. |
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| 3. |
What is a Primary market and what is a Secondary Market? |
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Any company who wants to raise its capital for its business approaches the public at large with an offer to issue and allot certain number of shares at certain prices. This is called as an initial public offering by the company in the Primary market. |
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Once these shares are allotted they get listed in the recognized stock exchanges where trading in the value of the shares take place in free market place by large number of buyers and sellers. This market place is called as a Secondary market. Currently on a nationwide basis BSE and NSE provides an on line trading platform to trade in Secondary market. |
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| 4. |
How can I invest in Shares? |
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(i) Direct Route: One can open an account with any BSE or NSE Broker or sub-broker and buy and sell shares in BSE or NSE directly. Investing directly calls for a bit of knowledge about the company and its business. One can also depend on research based advice given by his broker / sub-broker. Further one should have enough time to track his investment regularly. If you do not have these essentials it is advisable to opt for a professional to manage your investments via Portfolio Management Services (PMS) offered by any Investment Advisory Companies. |
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(ii) Indirect Route: One can invest in a Mutual Fund which in turn invests in the stock market. Mutual Funds collect money from a large number of investors and then invest the money in equity shares. They possess the requisite skills and expertise for this job for which a nominal Asset Management Fee is charged by them on the total corpus. |
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| 5. |
Who should invest in Stocks and in how much proportion? |
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Generally younger people are considered ideal candidate for investing in shares since they have more risk taking capabilities than elder one. The thumb rule is to deduct your age from 100. Ideally, your equity exposure should be that figure. For example, if you are 30, your equity exposure should be 70 (100 – 30). One should reduce equity exposure with advancing age. However, lately because of increase life expectancy and cost of living experts advise to have at least some exposure to equity at all ages. |
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| 6. |
What is my right as an equity share holder of a Company? |
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As an equity share holder one is entitled to a dividend if declared by the company. One is also entitled to the rights or bonus, shares declared by the company. Besides that, the shareholder has the right to cast his/her vote in a General Meeting on various matters that give strategic direction to the companies’ affairs. |
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| 7. |
How easy is it to make money from investment in shares? |
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It is not very easy to make consistent money from investing in the shares as there are a lot of risks and uncertainties involved. That is why it is very important to pick the right stock at a right time matching your investment objective. Generally, if you are buying shares of the company with a strong track record and good management, it will always give a decent return in the longer run. As already mentioned one should exercise due care and diligence in selecting particular stock. |
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One can also make money by trading into stocks and derivates. However, here also the most stringent trading and money management skills are required. |
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| 8. |
How can I analyze Stocks for investment and trading? |
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Broadly there are 2 methods to analyze stocks
(i) Fundamental analysis and
(ii) Technical analysis |
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Generally, for an investment decision of a medium to long term horizon, fundamental analysis is widely followed; whereas, for short term trading decisions technical analysis is widely followed. |
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Fundamental Analysis involves evaluating companies’ value by evaluating their business model, demand and supply of its product, its relative strengths and weakness in the industry in which it operates., the position of the industry, the sales and profit growth, return on equity, growth in earnings per share etc. The value so arrived at is then compared with the current market prices. If it is found that the market price is significantly lower than that, then it is advisable to buy the shares of that Company expecting that market will revalue the shares in future thereby offering capital appreciation in the value of the shares. |
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Technical Analysis on the other hand focuses on the market price movement of the share in the past mainly through graphs or price and traded volumes in order to judge further performance. Short term traders generally looking for a trading opportunity tries to capture the price trend for short term money making opportunities. |
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Although these two are widely followed and more rational approach for buying and selling decisions they are not infallible and hence are not full proof. |
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| 9. |
What are the do's and dont's to be followed while investing into equity? |
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Do not buy on rumours. Remember investing in equity is not like a gambling, it involves skill and knowledge. |
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Always buy shares of companies whose business you understand. |
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Study the company thoroughly with the information available in various newspapers, magazines, trusted online sources etc. |
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For relative safety and better chances of appreciation buy shares for the longer term, buy the shares as if you are buying business. |
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Never buy in haste. If you are buying a good business for a longer term it is a good buy irrespective of the time. |
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Always diversify in 8 to 12 stocks across different sectors & track regularly with proper focus. |
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Never be impatient and panic. Short term ups and downs in the share prices should not bother you much. |
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