Why Should You Invest in Equity Shares

Ask investors about their go-to investment strategy, and most will point you to something safe like mutual funds, bonds, ETFs, etc. While these modes of investments will protect your funds from market fluctuations, they will offer lower returns. This might be something you want or even prefer as a beginner investor.

But if you can stomach some risk, equity shares are a more profitable alternative. Why to invest in equity shares, you ask? Because the equity market has shown promise in recent years. In India, the equity market has touched all-time highs despite Covid-19, and it is also predicted to contribute majorly to India’s $5 trillion economy by 2024-25. And that’s not even scratching the surface! Here are twelve other advantages of equity shares you need to know.

What are Equity Shares?

Equity shares represent ownership in a company. When you invest in equity shares, you become a partial owner and gain the right to vote on company decisions and receive dividends. The returns on equity investments depend on the company's performance, market conditions, and other economic factors. 

Unlike fixed-income securities, equity shares do not guarantee returns, but they offer the potential for significant capital appreciation over time.

Types of Equity Shares?

Equity shares can be classified into different types based on their features and benefits:

• Ordinary shares: These shares are issued by a company to get funds for their long-term business expenses. They give shareholders voting rights and a share in the company’s profits.
• Preference shares: While they do not offer voting rights, preference shareholders receive dividends before ordinary shareholders.
• Bonus shares: These shares are issued to existing shareholders out of retained earnings as a reward, without any additional investment. These do not increase the total market cap of the company.
• Rights shares: These shares are offered to existing shareholders at a discounted price to raise additional capital.

Advantages of Equity Shares

Here are the various advantages of equity shares-

1. Wealth Creation 

Equity shares have the potential for high returns, making them a powerful tool for long-term wealth creation.

2. Dividend Income 

Many companies distribute a portion of their profits as dividends, providing regular income.

3. Liquidity

Equity shares can be easily bought or sold in stock markets, offering flexibility to investors.

4. Inflation Hedge

Unlike fixed-income investments, equities tend to outperform inflation over time, preserving purchasing power for the investor.

Why Should You Invest in Equity Shares?

Flexibility

Just about anyone can begin investing in equity shares. One can start with a small investment in small or medium-cap funds and decide how and when they want to hold or sell their shares as they wish.

Higher returns

One of the most significant advantages of equity is that investors can get better returns on their investments on both the short-term and long-term front. To get returns in the short term, you will need to strategically pick stock picks that will do well immediately. These investments are known to do well in the long term. So, if you invest now, you can get good returns a few years down the line.

Right over assets and income

Why to invest in equity shares? Here’s another reason. When you invest in equity, you own a small part of the company. So, you have ownership over a small fraction of company assets and get returns in the form of dividends if the company does well.

Bonus shares

Many companies offer bonus shares in equity to investors in exchange for dividends. So, if you own ten shares of a company, trading them at Rs. 1000, the company gives you bonus shares at 10:1. Then you get a net return of Rs. 11000 instead of Rs. 10000 due to the bonus shares if the company makes a profit.

Stock splits

Stocks of equity shares can be split and traded in the market, getting investors long-term returns. Here’s how: A stock split lowers the cost of investing in a single share, making it more affordable for buyers and increasing their demand. Now, the increase in demand drives the stock prices of the company shares.

Right shares

Investing in equity shares also gives investors the advantage of buying the right shares as they are public. Companies preferentially offer the right shares to existing equity investors at lower prices than the ’stock’s market price. Such offers are common when the company requires capital to fund its expansion plans.

Tax advantage

Among all the other advantages of equity shares, availing tax benefits on equity investments perhaps tops it. Unlike other investments, these don’t have a lock-in period. Besides, you also benefit from taxation norms around long-term capital gains (LTCGs) and short-term capital gains (STCGs) tax. According to the updated document, LTCGs are taxed at 10% on amounts of over Rs.1 lakh without indexation, and STCGs get taxed at 15% with indexation.

Residual claim

If the company you invested in shuts down, you can lay claim on any remaining assets or funds left after paying off stakeholders like lenders, debenture holders, etc.

Potential returns that tackle inflation

Equity returns help you truly beat inflation. This is because the return rate offered by equity investments exceeds the inflation rate by a lot. In fact, stock indexes for equity investments have outperformed the returns offered by most comparable investments in the long term.

Protection by the SEBI

In India, equity investments are closely regulated by the Securities and Exchange Board (SEBI). This reduces the instances of fraud or unnatural activities encountered while investing dramatically.

Collateral against loans

Need collateral to help you get a loan? Equity investors can pledge their equity shares as collateral for loans. Most lenders offer loan amounts amounting to 50% of the equity shares or 50% of equity mutual funds owned by an investor.

Streamlined processes and transactions

Investing in equity shares is simple. Today you can invest in equity online without the help of a broker or financial planner. Just set up an account and have a plan. Many online platforms allow you to do this in a few simple steps.

Over to You

Now that you have a clear answer to why to invest in equity shares, it’s time you start investing. Before you go all in, keep these pointers in mind -

• Factor in share market volatility before investing.
• Pick stocks after researching and analyzing them thoroughly.
• Be patient, and don’t always follow the herd market.
• Monitor your portfolio regularly to make sure your investments are getting returns.

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FAQs on Equity Shares

What is the main reason for investing in equities?

Investing in equities offers the potential for capital appreciation, allowing investors to grow their wealth as company values increase over time.

What are the Features of equity shares?

Equity shares represent ownership in a company, granting shareholders voting rights, entitlement to dividends, and residual claims on assets upon liquidation. They are non-redeemable and provide limited liability to investors.

Is it good to invest in equity stocks?

Investing in equity stocks can be beneficial due to their potential for high returns and dividend income. However, they come with higher risk and volatility compared to other investments. So, you must assess your risk tolerance and investment goals before proceeding.