Equity, a word that is one of the most prevalent ones, when it comes to stock market investments. Majority of the investors placing their feet for the first time in the stock market generally start with Equities. However, very few of such beginner level investors and traders actually understand the meaning of Equities as an investment class.
Well, in this tutorial, we will go at length and talk about specifics of Equity as an investment class, what kind of risks it carries, how much returns you can expect over a period of time and so on.
Let’s start with a real-life example to under the basics of this concept of Equity.
Understand this – Equity is basically ownership in the company, a stake!
Let’s say you choose to buy 100shares of a company that has a total of 10000 shares listed on the exchange. In that particular case, you now own 1% of the complete company’s ownership. In a sense with 1% equity, you are now one of the stakeholders in the company and based on its performance, your profit or loss will get impacted.
In other words, in case the performance of the company is in the positive direction, then your equity value will also increase and vice versa.
Another way to understand the concept is:
Let’s say you have ₹1 Lakh as a disposable that you are looking to invest.
Either you can invest the money into a business that you yourself are looking to start. Although, there could be future potential in that idea, however, there is some sort of uncertainty as well. You may also choose to open a Demat account and invest in a business that has a proven revenue model and is listed on the stock market.
Yes, there is some risk in this idea as well but most of the times, in a stable share market, the blue-chip or highly established companies can be trusted.
For any business to flourish, in which you have invested your money or yourself, there are specific aspects that need to be taken care of:
Business solves a sizable problem faced by a consumer group
Business has specific USPs (Unique Selling Propositions) that differentiate it from the competition
The business has a long-term growth plan
Thus, if you are buying equity or stake in a company that has gone through such phases, then yes, it certainly makes sense to invest in such a company.
In India, if you are looking to invest in Equity, you can invest in shares through NSE (National Stock Exchange) or BSE (Bombay Stock Exchange) which are registered exchanges of SEBI (Securities & Exchange Board of India). There are few other stock market exchanges as well, but primarily traders invest through the exchanges listed above.
There are a couple of ways in which you can invest in Equity:
Either through the primary market where the company files an IPO and traders bid for the subscription. There are different ways to apply for an IPO where IPO through ASBA is one of the most prominent ways.
Once the company gets listed on the exchange, you can buy or sell shares in the secondary market as well. The price of these shares is then decided based on the concept of demand and supply.
This needs to be understood that it is a matter of chance that you actually end up getting an allocation of funds if you apply for an IPO, you can trade easily through the secondary market for the kind of shares you are interested to buy.
When you talk about equity derivatives, well, it is seen as one of the derivatives classes which gets its value, at least partly, from the underlying equity security. Some of the most commonly used equity derivatives are Futures and Options.
To provide you with a quick idea on some of the latest numbers of contracts running on the stock market:
Index Futures: 2,01,667
Index Options: 94,57,609
Stock Futures: 6,89,492
Stock Options: 7,61,005
The overall valuation of these contracts is in the range of ₹7,72,268.07. Huge, right?
Equity examples are of multiple kinds. Some of those are listed below for your reference:
Additional Paid-in Capital
Each of these equity examples mentioned above has its own set relevance in stock market investments.
Equity Vs Commodity
Beginner level traders generally get confused with different kinds of investment products. One of those confusions is around Equity and Commodity. However, both these investment products differ in the following ways:
Where equity corresponds to ownership in a company or a business, a commodity in itself is a basic financial product which investors can take positions in.
Equity product is traded with the help of exchanges in the form of future or option contracts generally through delivery but the commodity is limited as a derivative product mostly.
Liquidity in equity products is higher than in the case of commodities.
Equity Vs Debt Funds
Moving ahead with the comparisons, equity and debt funds are completely different financial products too. Here are some quick differences between the two:
The nature of the invested funds is different. In Equity, you invest in specific company stocks buying a stake in the business while doing so. However, in the case of Debt funds, money is invested in a pool of government bonds, corporate bonds etc.
Equity funds are seen to be relatively riskier as compared to debt funds.
Short-term equity investments (less than a year) draw a tax of 15% while long-term investments (more than a year) have no taxes levied. Debt funds, on the other hand, the taxes are in the range of 20% for a 3-year holding period.
Equity, generally, brings higher returns as compared to debt funds.
Equity Vs Mutual Funds
One of the most looked-forward comparisons is Equity vs mutual funds. Well, there are differences, quite a few actually. Some of those are discussed here:
You can individually select stocks in equity investments but not in mutual funds.
You may choose to enter or exit a stock as per your comfort in the case of equity, but it does not work like that in case of mutual fund investments.
Mutual funds are a relatively safer investment product as compared to equity but then bring lesser returns than the latter.
Equity, as a financial product, has its charm and of course differences from other fellow financial products. It all depends on how you, as an investor or a trader, look at this financial class.
Nonetheless, let’s move on and understand different kinds of equities you can invest in.
Types of Equity
On a general basis, there are 3 types of Equity Funds in the Share Market, namely:
Large-Cap Equity Funds
These funds generally belong to mature companies in the business such as Infosys, SBI, HDFC that have proven business models. The return percentage is not that high, but is consistent and certainly be trusted for long-term investments.
Mid-Cap Equity Funds
These funds belong to companies that are mid-scale in size and have shown reasonable progress in their monetary and competitive performance. Some of these funds include Abbott India, Aditya Birla Fashion etc. The risk factor in these is relatively better than Large-cap equity funds, however, the risk level is relatively high too.
Small-Cap Equity Funds
Equity funds falling in the Small-cap segment come with the highest of the risk percentage as compared to the rest of the fund types. However, for risk-taking traders, these type of funds are work well while risk savvy investors should generally stay away from small-cap funds. Some of the examples include 5Paisa, 3i Infotech, Ace Exports etc.
Thus, based on your risk appetite and investment objectives, you can make a corresponding choice with the kind of funds you would like to invest your money in.
Equity-Related Quick Facts
Here are some interesting facts related to this trading class that you must be aware of:
In order to invest in Equity, you can use either of the trading platforms including a mobile app, terminal software or web-browser application. You can also choose to use the call and trade facility in order to place your order in the stock market through your stockbroker.
Within Equity class, you can buy and sell the shares on the same day (called Intra-day trading) or choose to buy today and sell later (Delivery based trades). To be relatively safer, you can choose to trade in derivatives (that is, futures and options).
If you are looking to trade just in intraday based trading, then you actually do not need a Demat Account and just a trading account since the shares will not be stored in your account anyway.
In case you buy and sell in delivery based trading, then once you buy the shares, the stocks will be stored into your demat account after T + 2 days where T is the day of the trade.
Mathematically, Equity is basically the difference between the assets and the liabilities of the company i.e. Equity = Assets – Liabilities.