What is equity?

Rahul is an avid investor in the equity market and advocates strongly for investing in equity. Gagan, a close friend of Rahul, is completely wary of equity as an investment option, the key reason being he doesn’t have adequate knowledge about equity market and perceives it to be the riskiest asset. During the conversation, Gagan asks Rahul what is equity as he wants to unravel the mystery behind equity.

What is equity?

When you buy an equity share of a company, you are buying into the ownership in the business. As an equity investor, you are a partial owner of a company. When the new shares are issued by the company to the investors directly, it is called as “primary market”, where the transaction happens directly between the company and the investor.

The investors, who have bought the shares from the primary market, cannot sell back the shares to the company whose shares they are holding. In such case, they will have to look for a suitable buyer to sell the shares of the holding company. A virtual marketplace is created for the benefit of such buyers and sellers called as “Stock Exchanges”, where equity shares are bought and sold. The stock exchanges are called as “Secondary Markets”.

Equity as an investment option:

The moment you think of equity, the following questions would surely cross your mind: - “How are the markets doing?”, “which is the best company to invest in?”, “Since the markets are going down, should I start selling my equity investments?” etc.

Most of the people visualize “Equity Investment” as sitting in front of the trading screen watching business news channel and actively buying & selling stocks. The other form of equity investing is waiting for the “tips” or “insider information” to make a killing in the short run by investing into such companies.

No wonder then that the wise men compared investing money in a stock market to betting/gambling. In both these cases, you are following the trend and reacting to it on a regular basis with a hope that the investment you have made would yield good returns in the short run. In most cases people lose money and very few “lucky” ones make a fortune. But next day it’s uncertain again. So equity investments are very risky if invested this way.

We fail to differentiate the basic difference between speculation and investment.

Illustration disclaimer: The above example is only for illustration purposes & shall not be construed as indicative yields/returns of any of the Schemes of Canara Robeco Mutual Fund.

When the concept of speculation or gambling is involved, one person’s gain is other person’s loss. The outcomes are quick and the parties involved would know whether they have made or lost the money.

When the concept of speculation or gambling is involved, one person’s gain is other person’s loss. The outcomes are quick and the parties involved would know whether they have made or lost the money.

Investment is a scenario where it would be a win-win situation for all the parties involved. The outcome may take longer, but the benefits are worth the wait. When an investor invests money in a growing business, he will have to give time to the business to perform and start reaping the benefits in the years to come.

One can relate this to sowing a seed and nurturing before reaping the fruit. Investing is a well-evaluated and disciplined process.

Why should the stock prices go up and companies perform in the long run?

When we look around, the whole universe is coming together to ensure we are spending. One can spend money just at a click of a button and our economy is thriving on consumer spending. For the sake of example, let’s assume an individual has been a customer of Airtel since October 2002 and if his average monthly mobile bill is Rs.1000/- he would have spent Rs. 156,000/- till September 2015.

Every customer paying the bill paid adds-up to the revenue of the company and over the years the company has grown leaps and bounds so is the share price. Along with paying Rs. 1000/- towards the mobile bill, if another Rs. 1000/- every month had been invested in Airtel equity shares, the value would have grown to 530,000/- as on September-2015, giving annual returns of 16.31%.

The craze of Apple products across the world has made Apple Inc built a cash reserve of $ 200bn and last 10 years it has yielded returns of 33%p.a.

When we spend companies make money. We can earn the money that we have spent on the companies by investing in their shares.

Performance of Sensex:

If one looks at the performance Sensex over last 26 years, there are quite a lot of ups and downs and volatile. But had an investor waited for 26 years, he would have earned the average returns of 13.19% p.a. CAGR over years.


It pays to be an investor in Equity!!

Disclaimer: Mutual fund investments are subject to market risks, read all scheme related documents carefully.

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Printable version | Feb 23, 2020 1:17:02 AM |

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