Equity, popularly known as shareholders’ equity, refers to the amount of money that a company’s shareholders would get if all of the company’s assets were liquidated and all of its debts were paid off. In case of acquisition, equity is the value of company sales minus any liabilities owed by the company. When someone invests in a company’s equities, they become its partial owner.
Equity is important in the sense that it represents the value of an investor’s stake in a company. Upon investment in a company’s stocks, investors can earn profit via capital gains or stock price appreciation. Moreover, shareholders enjoy the right to vote on corporate actions, including elections for the board of directors.
Equity shares are known to give high returns to shareholders, especially when you stay invested for a long period of time. However, investing in equity shares involves a certain amount of risk, despite being an outperforming asset class.
Types of Equity
Equity investments can be divided into several categories based on associated risks, rewards and terms of investment. Following are broad categories of equity investments:
Shares
Shares represent units of equity ownership in a company. Shareholders are entitled to profits that the company may earn in the form of dividends. Equity shares of publicly listed companies are traded on designated stock exchange houses i.e. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
In terms of rate of return, shares are considered best investment options – with equally a high degree of risk.
Equity Mutual Fund Investment
Mutual funds are investment options wherein capital is collected from a diverse group of investors and is invested in various debt and equity securities, such as stocks, bonds, F&O (futures and options), and many such other assets. An equity fund is a mutual fund scheme wherein at least 60% of an asset is invested in equity shares of different companies.
Equity mutual funds can be divided into different sub-categories based on the market capitalization:
Large Cap Equity Mutual Funds
Large cap equity fund schemes invest in well-established large companies who rank between 1 and 100 in terms of market capitalization. These mutual fund schemes are considered to be the least risky investments when compared with other types of equity mutual funds, and offer stable returns over time.
Mid-Cap Equity Mutual Funds
These equity mutual fund schemes invest in stocks of mid-cap companies that rank between 101 and 250 in terms of market capitalisation. Mid-cap equity mutual funds are well balanced funds in terms of risk and rewards – they are less risky than small-cap equity funds but riskier than large-cap equity funds. However, they tend to offer better growth potential than large-cap stocks.
Small-Cap Equity Mutual Funds
These schemes invest in the shares of relatively small companies ranking above 250 in terms of market capitalization. As compared to large and mid-cap equity funds, these funds are considered to be riskiest, but have potential to deliver the highest returns.
Large and Mid-Cap Equity Mutual Funds
These schemes divide the fund allocation equally between mid- and large-cap funds for high returns and stability. Each market cap receives 35% allocation of the total asset value.
Multi-Cap Equity Mutual Funds
These schemes invest in stocks across all market capitalization including large, mid and small cap companies. The fund manager allocates funds in these stocks based on the prevalent market conditions. These funds give exposure across the market to customers who want to diversify their portfolio across the market.
Equity Futures
Equity futures are financial contracts between buyers and sellers to buy or sell the underlying asset at a predetermined price at the future date. These contracts generally have an expiry period of three months with the last last Thursday of third month being the settlement day.
Equity Options
Equity options are similar to equity futures where involved parties have the right, but are under no obligation, to buy (in the case of a call) or sell (in the case of a put) the shares of the underlying asset at a predetermined price on or before a certain date.
Shareholder’s Equity Formula
You can use the following formula to calculate the equity of a firm:
Shareholder’s Equity = Total Assets – Total Liabilities
You can find this information on the company’s balance sheet.
Advantages
Individuals can enjoy the following benefits by investing in equity shares of a company:
- High Returns: Owning stocks in a company gives shareholders the opportunity to get high returns. By investing in equity shares investors can enjoy wealth creation through dividend earning and capital appreciation.
- Ease of investment: You can easily buy shares of a company, by availing services of a stockbroker to invest via any of the stock exchanges in a country. If you have a Demat account you can easily buy stocks in a few minutes in India.
- Portfolio diversification: People usually invest in fixed deposits, gold, real estate, or debt instruments due to lower volatility. However, these assets usually don’t generate high returns, and hence you should diversify your portfolio by investing in equity shares for higher returns.
Disadvantages
There are pros and cons of investing in equity shares. Following are some of the most common disadvantages of equity investment:
- Higher market risk: Investing in equity shares can generate high returns but they expose investors’ portfolios to high market risk as compared to other debt instruments. Sometimes, investors can lose the entire investment amount by investing in equity shares.
- Risk of Inflation: Rising inflation can dilute a company’s worth and, as a result, its shares might not generate potential returns.
- Risk of Political and Social Instability: Political and social stability in a country can affect the growth of a business. For example, higher taxes and strict regulations can lead to a decline in stock prices. Moreover, if the government of a country promotes indigenous businesses, this may make it difficult for foreign businesses to operate in the country. Investors who have invested in stocks of foreign companies will not earn high returns from their investment.
NRIs willing to invest in equity stocks or mutual funds in India must consult market experts to make informed decisions. You can get detailed mutual fund advisory from experts at SBNRI. You can download SBNRI App from the Google Play Store or App Store to ask any questions related to mutual fund investment, NRI account opening online and tax filing in India. To ask any questions related to Mutual Funds, click on the button below. Also visit our blog and YouTube channel for more details.
