Equities

HomeAll ServicesInvestment ServicesEquities
Equities

Equities:

Equity, often simply called “stocks” or “shares,” represents an ownership stake in a company. When you purchase equity, you are essentially buying a small piece of that business, making you a “shareholder.” This ownership entitles you to a portion of the company’s profits and a claim on its assets if it were ever liquidated. Unlike debt, where you lend money to a company for a fixed interest return, equity allows you to participate directly in the company’s success (or failure). As the company grows more valuable, so does your piece of the pie.

How Returns are Generated:

Investors in equity primarily earn money through two channels: Capital Appreciation and Dividends.

  • Capital Appreciation occurs when the market price of the share increases over time; if you buy a share at ₹100 and it rises to ₹150, you have made a capital gain.
  • Dividends are a portion of the company’s net profit distributed back to shareholders, usually as cash. While high-growth companies (like many in Tech) often reinvest all their profits back into the business, mature companies often pay regular dividends, providing a steady income stream for investors.

Types of Equity Shares:

There are different “flavors” of equity, each with its own set of rights and risks:

  • Common Stock: This is what most people mean when they talk about stocks. It grants you voting rights on corporate policies and the election of the board of directors. However, in the event of bankruptcy, common shareholders are the last to be paid.
  • Preferred Stock: These shares function somewhat like a hybrid between a stock and a bond. Preferred shareholders usually do not have voting rights, but they have a higher claim on assets and earnings. They receive dividends before common shareholders and are paid out before them if the company is liquidated.
  • Bonus Shares & Stock Splits: Sometimes companies issue extra shares for free (Bonus) or split one share into many (Stock Split) to make the price more affordable for retail investors, though your total ownership value remains the same initially.

Advantages of Equity Investing:

  • Historical Superiority: Over the long term, stocks have consistently outperformed bonds and savings accounts (averaging annual returns after adjusting for inflation).
  • Purchasing Power: Because companies can raise prices as costs rise, equity acts as a natural shield, ensuring your money grows faster than the cost of living.
  • Fast Access to Cash: Unlike real estate or fixed deposits, you can usually sell shares on a major exchange (like the NYSE or NSE) and have your cash available within days.
  • Flexibility: You have the freedom to sell small portions of your holdings whenever you need funds, rather than being forced to sell an entire asset.
  • “Seat at the Table”: As a shareholder, you own a piece of the company’s future.
  • Voting Rights: You can vote on major corporate actions, such as electing the Board of Directors or approving mergers, giving you a voice in how the business is run.
  • Capped Risk: If the company goes into debt or fails, your personal assets are protected. Your maximum loss is strictly limited to the amount you originally invested.

 

Risks and Volatility:

  • Price Fluctuations: Unlike a savings account, your “principal” (the amount you put in) is not safe. Prices change every second based on news, earnings, and global events.
  • External Factors: Factors like interest rate hikes, wars, or pandemics can cause the entire market to drop, even if the specific company you own is doing well.
  • No Guarantees: If a company goes bankrupt, the stock can go to $0.
  • Order of Payout: Shareholders are “residual claimants.” In a liquidation, banks, employees, and bondholders get paid first. Common stockholders are the last in line and often receive nothing.
  • The “Exit” Problem: In major stocks (like Apple or Google), you can sell instantly. In “penny stocks” or small companies, there may be no buyers when you need to sell.
  • Price Impact: If you are forced to sell an illiquid stock quickly, you may have to accept a price much lower than the “market” rate just to find a buyer.
  • Performance Dependency: Your returns are tied to the company’s management. Bad decisions, fraud, or a competitor’s breakthrough (like an AI advancement displacing an old tech firm) can permanently devalue your shares.
  • Transparency Issues: Smaller companies (penny stocks) often have less strict reporting requirements, making it harder for you to know the “true” health of the business.

The Role of Equity in a Portfolio:

For most people, equity is the “growth engine” of their financial life.

  • Inflation Hedge: Because companies can raise prices for their products as inflation rises, their earnings (and thus your share value) tend to keep pace with or exceed the cost of living.
  • Compounding: By reinvesting dividends to buy more shares, you create a “snowball effect” where you earn returns on your returns. Over 20–30 years, this is the primary driver of wealth.