What are Equities?
One of the most traditional ways of seeing your portfolio grow is to invest in equities/stocks/shares. When a company lists on a stock exchange, it gives all investors to own a part of the company in the form of equities or stocks as they are popularly known. As you become a part owner of the company by owning its shares, you get rewarded (in the form of dividends) when the company makes a profit. However, you need to bear with the losses too when the stock price plummets reacting to negative news or developments. Although investing in equities can reward you with handsome gains if you stay invested for the long term, you must also recognize the fact that they are the riskiest asset class and should be chosen after careful consideration.
What are the Benefits of Investing in Equities?
Although stocks are considered risky, here are some reasons why equities as an asset class is considered the most rewarding
- Gives you an opportunity to diversify across sectors and industries
- As a result of diversification your risk is well spread
- If you make the right choices, your portfolio remains liquid
- Yields impressive returns over the long term
- Grants you the ability to invest in small amounts as often as you want
- You can remain invested as long as you want or book profits as per your wish
A developing economy in India makes it a land of opportunities. There are therefore a variety of investment options across asset classes such as equity,debt, commodity and real estate. When it comes to making investments the first thing you should consider are your financial goals. The other most important factor one must evaluate while making an investment is the risk factor involved in the investment and the quantum of returns it would yield. In financial parlance it is called judging the risk reward ratio of an investment. Therefore while a bank FD may be considered “safer” the returns are much lower as compared to equities as an asset class.
For the longer term equities pay higher returns as compared to investments such as real estate and gold. To put things in perspective consider a comparison of the returns of various asset classes over the past five years
| Asset Class | % of Returns |
|---|---|
| Real estate | 30 |
| Gold | 10 |
| Bank FDs | 8.5 |
| Equity | 35 |
Factors to Consider before Investing in Stocks
The first factor that you should consider before investing in stocks is your current financial position. Make sure you have a well stashed emergency fund and your bread and butter money kept aside to take care of your everyday needs before you consider investing in stocks.
Once you are sure that you have the financial wherewithal here are the basic things you need to consider while investing in stocks
Price
Before you make any investment decision the first factor you consider is the price, and stocks should be no different. Just like you wouldn’t pay extra even for a great product unless you are getting it at a good price, the same holds true for stock investing as well. If you buy into a good company, at a wrong time you will lose money on your investment. The trick is to look for value buys that also ensures that you remain invested for a longer period of time.
Intrinsic value
Before buying or selling the shares of any company, look at its intrinsic value or its true value. A simple way of finding the intrinsic value of a company is subtracting its liabilities from its assets. This gives you the net worth of the company. If you are comfortable with some advanced analysis you can look at earnings per share (EPS), Price/ Earning ratio, market capitalisation, future cash flow and growth prospects and corporate governance, to arrive at an investment decision.
Although, you can use various tools of analysis, there is no knowing for sure if you have made the right decision as things may go haywire at any time. But as you get more and more comfortable with stock analysis, you will be able to discern a pattern and thus make better purchase or selling decisions over time.
