Equities are pieces of a company, also known as "stocks or shares". When you buy shares of a company, you're basically purchasing an ownership interest in that company. A company's stockholders or shareholders all have equity in the company, or own a fractional portion of the whole company. They buy the shares because they expect to profit when the company profits. Companies issue two basic types of shares: equity and preference shares.
Equity shareholders are the owners of a company and initially provide the equity capital to start the business.
A first time investor needs to understand that every investment carries certain degree of risk and the potential to earn is directly linked to the degree of risk taken For a long-term investor, it is essential to ensure that he earns positive real rate of returns i.e. rate of return minus inflation. Equities, as an asset class, have the potential to achieve this. No doubt, equity markets can be volatile over the short-term and that makes equity markets a risky proposition in the short-term.
Participants in the stock market range from small individual to large hedge fund traders. Large institutions like pension funds, insurance companies, mutual funds, index funds, exchange traded funds, investor groups, banks and various other financial institutions also participate.
- Capital Appreciation
- Dividends
- Voting Privileges
- Marketability - Shares can easily be Bought or Sold
Step 1: Understand how the stock market works
When you read you begin with A-B-C. When you sing you begin with Do-Re-Mi. And when you invest in stocks you begin with business-company-shares.
Before you embark on your journey to invest in equities, teach yourself how the stock market works. Read this easy guide
Step 2: Learn how to Choose a Stock
Having understood the markets, it is important to know how to go about selecting a company, a stock and the right price. A little bit of research, some smart diversification and proper monitoring will ensure that things seldom go wrong.
It’s not that difficult: Just follow these 4 golden rules.
1. Choose the Right Company
Look for superior and profitable growth. The company should earn at least 20% return on its shareholders capital.
Ideally a long-term investment perspective (more than five years) allows you to participate in the company's growth. At the short end (3-6 months), share performance is driven more by market sentiment and less by company fundamentals. In the long run, the relevance of the right price diminishes.
2. Be Disciplined
Stock investing is a long, learning experience. You will make mistakes, but also learn from them. Here is what you can do to ensure a smooth ride.
Diversify your investments. Do not put more than 10 per cent of your corpus in one stock, even if it's a gem. On the other hand, don't have too many - they become difficult to monitor. For a passive long long-term investor, 15-20 is a healthy number. Use this asset allocation tool to find out if you need to invest beyond equities.
Research and analyse your company's performance through quarterly results, annual reports and news articles
Get a good broker and understand settlement systems.
Ignore hot tips. If hot tips really worked, we'd all be millionaires. Resist the temptation to buy more. Each purchase is a new investment decision. Buy only as many shares of one company, as fits your overall allocation plan.
3. Monitor and Review
Regularly monitor and review your investments. Keep in touch with quarterly results announcements and update the prices on your portfolio worksheet at least once a week. This is more important during volatile times when there can be great opportunities for value picking!
Also, review the reasons you earlier identified for buying a stock and check whether they are still valid or there have been significant changes in your earlier assumptions and expectations. And use an annual review process to review your exposure to equity shares within your overall asset allocation and rebalance, if necessary.
4. Learn from your Mistakes
When reviewing, do identify and learn from your mistakes. Nothing beats first-hand experience. Let these experiences register as `pearls of wisdom' and help you emerge a smarter equity investor.
Step 3: Decide how much to Invest
Since equities are high risk, high return instruments, how much you should invest would really depend on how much risk you can tolerate. Without going into complex profiling models, the simple rule of thumb is: 100 less your age should be your % allocation to equities.
Step 4: Monitor and Review
Monitoring your equity investments regularly is recommended. Keep in touch with the quarterly-results announcements and update the prices on your portfolio worksheet atleast once a week.