People nowadays do easily take up job roles in Companies. They hence start earning. Though it is a tedious job for a few to get one. Hard work applied with some additional smart push helps the life going. You might even learn the way to earn more at later stages.
Certainly one day you will start thinking, I am earning, that’s correct. But what am I doing with that hard earned money? Yes. I’m depositing the money in my savings account. And if I get more pips then I would collect them and keep it in a fixed deposit in a well-known bank. But am I getting a good return from depositing in banks?
De facto, you might earn maximum returns around 7.5-8% per year. Is that more or less? To get an answer to this, you need to look for some comparison. Is there anything more where I can invest my money? Get more returns than the bank returns? Also, keep in mind our inflation rate which also revolves around the same range of bank returns. Is there any other investment available which can help fight inflation?
So there are many extra return generating vehicles or assets available for investors and traders. To name a few there is Stock market which has many sub-divisions viz. Equity, Commodity, Derivatives, and few more. Real Estates, Gold and other tangible assets also do create enormous wealth in due course of time but needs huge investments too. Hence cannot be recommended for a retail investor or a low/medium size earning person. Rather here Stock market can be a kind of relief to these people.
Equity investments can be done with even 500 rupees. Yes even that would suffice the doing. You will still earn good returns albeit in small numbers. But that won’t be case if you invest with more cash, intact with the perfect analysis and strategies. The take from equity is that it possesses relatively minimal risk factor. This happens in Equity as you are investing in a business with sound earnings and after good analysis. As the business starts making money, over time your returns will skyrocket!
Here in this article, let us consider the common asset class – Equity. We will be delving into the pros and cons of Equity Investing.
Let’s get started:
Pros of Equity Investing
Dividend amount is decided by the Company’s Board of Directors. This income for the investors is to keep them stay invested. There are some stocks in which people invest only aiming the consistent dividend income. By giving the Company gets more funding. Smart Investor who knows the power of compounding would suggest rather to invest back that dividend amount into the business of the Company. But that is just a perspective from one angle. Things may vary from others’ view too as needs vary.
Gain on Investment
This actually has to be the first point for the pros section. But we have taken it to second considering the variation in gains with market volatility. Dividends are rather relatively more consistent ones. We will come to this later in the cons section. Let’s first concentrate on the pros of gains from equity investment. If the right tools and techniques are implemented in the right direction then there are very fewer chances of the work to go in vain. Fundamental and Technical analysis must be the right ones here. With experience, you will slowly learn the market behavior. When all dots get connected then there are some happy earnings/gains from your capital invested.
Control over Investment
In equity investing, the shareholder is the king. You can exit holdings whenever you wish to. There is no restrictions in doing that. This is among key benefits of equity investment. What more you need? For getting back the money locked in a fixed deposit, you have to wait till the lock-in period expires. Till that time you won’t have any control over “your” money.
Once a retail investor puts his money into a Company shares, he is more of a shareholder of the Company than just an investor or a fund provider. He owns a part of the Company’s business. He can proclaim himself as the owner of so and so Company. (Note: We recommend you keep in mind this point while investing in any Company shares. You should think from the perspective of a business owner and not just an investor. This comes handy to balance your emotions when the shares start plunging as you being the owner is well aware of what is actually happening with your business.)
Possess Shareholder Rights with No liability involved
As mentioned earlier, being the shareholder of the Company, you have certain rights entailed with the role. It may be true to some extent that you cannot make the changes in the business directly. But it can be done indirectly too. Public Company’s conduct Annual General Meetings (AGM) to make sure the Investor interest is preserved. Opinions and reviews of shareholders are considered during such AGMs.
You are the owner of a small or negligible part of the firm. That’s true. But when the business profit faces dip, you are not answerable to anyone. The key takeaway here is that there is absolutely no liability involved for a retail investor.
As the name suggests, bonus shares are the extra shares given on per share basis to the shareholders. This is mainly done for three main reasons. One can be to capitalize a part of the Company’s profits that are retained. Second can be for the purpose of elevating stock price to a premium level. The third reason can be for the distribution of the reacquired shares that the Company actually had earlier bought back to reduce the outstanding share number.
The Company issues share splits to increase the share count of the Company. And after a stock split, the price is reduced too. This will attract more retail investors to fill in the equity positions of the firm. Common types of share split include 2-for-1, 3-for-1, and 3-for-2. Other split ratios like 4-for-3, 5-for-2, and 5-for-4 also exist. But they are rather used very rarely by Public Firms.
Cons of Equity Investing
The Dividend is obviously a plus for investors along with their capital gains from the same stock. But this dividend, as earlier mentioned in the pros, are decided by the Board of Directors of the Company. They decide on the basis of the Earnings made and retained by the Company. They do consider the needs the Company may have in the future, the liabilities, the cash status, and then decide certain amount as dividend for the investors from the leftover retained profit. These may vary with cash dependent outlook of the Company. At times, no dividend is paid by the firm. Retail investors have to be ready to face such scenarios too.
If you do not perform the right analysis for any Public Company before investing, there sustains higher chances of losing money. There are many Companies that involve in fraud activities like manipulating share prices, frauds by the CEO or any key personnel for personal benefit, etc. On the accounting books, things may look very lucrative. But the actual truth may be something else. All the Big and Institutional Investors do not touch such stocks. Yes. They are smarter ones than the majority. The major loss in such cases happens only with the retail investor who is less aware of the actual happenings in the Company business. The best precaution would be doing a deep analysis of the Company before taking such investment decisions.
Volatility in the Share price
The market is highly volatile. It keeps on changing its mood over time. Major World Events like Fed rate announcement, Brexit, US-China Trade War are a few to be named. Share price changes depending on various factors. It may be a macro cause or maybe pertaining solely to the Company’s business. Smart Investors keep tracking such key global events and map it with their Company business. Such analysis may at some time need an expert touch and demand for investing time too. In such cases, people approach an Investment Advisory Firm. Give them your money, just focus only on your daily work to earn more. They will do the job for you. In the long run, one realizes the importance of doing so.
Claim during bankruptcy
When a Public Company dissolves, it looks for repaying its debt first. Then the final taxes are paid. The last priority goes to the equity holders of the Company. This happens because this is the legitimate process a Public Company has to follow in such emergencies. If the Company, let’s suppose, paid the equity holders first. And the creditors got to know about this. Then they can sue the Company on such grounds. In order to avoid such legal complications, the Company follow the law and regulations pertaining to bankruptcy. Investors as discussed in the earlier point should make investments only after performing complete study about the Company.
These were the major pros and cons of Equity Investing. Hope you enjoyed reading.
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