Equity Investing- Types, Risks and Differences With Non-Equity Investments And Equity Shares
By Jupiter Team · · 5 min read
There is a growing awareness among people to invest in the stock markets. More people are actively showing interest in investments. As per a survey reported by the Times of India, 2 in 5 families are likely to invest in equities or mutual funds. Out of the population surveyed, 10% showed interest in equity investing, while 31% showed interest in mutual fund investment. Interestingly, mutual funds also tend to invest in equity instruments. Let’s decode everything you need to know about equity investments.
Equity vs. Non-Equity Investments
When it comes to investment, investment instruments can be broadly classified into equity and non-equity investments.
This encompasses investments in equity instruments. Equity instruments are basically the equity shares issued by companies to raise capital from the public. Equity investments comprise investments in either the listed shares or unlisted shares, the former being predominant. Listed shares trade on recognised stock exchanges like National Stock Exchange and Bombay Stock Exchange.
This comprises investment in instruments other than equity instruments. This can include all other investment avenues like bonds, fixed deposits, gold, real estate, or even crypto investments.
Types of Equity Investments
You would be happy to know that there are multiple types available to investors for investing in equity instruments. This includes:
- Equity Shares:This is when you directly invest in equity shares of the company (discussed in detail later).
- Equity funds:This involves investing in those funds that invest in equity shares of the company (discussed in detail later).
- Futures: Futures are one type of derivative instrument. It derives its value from the underlying asset, which can be equity shares, currency or commodities as well. Investors can trade in equity futures as part of their equity investment strategy.
- Options: Options are also a type of derivative instrument. Options give the option holder the right but not the obligation to buy or sell the underlying asset. Here also, the underlying asset can be equity shares, currency, or commodities.
What Are Equity Shares?
As stated earlier, equity shares are the instruments used by companies to raise capital. While for the company, it is a method of financing, for investors, it is an instrument to invest and earn returns. Equity shares represent a unit or part ownership in the company. The entire share capital of the company can be divided into units of small denominations. These units are known as equity shares.
What are Equity Funds?
Funds are nothing but pooling money from various investors and investing it in the underlying asset as per the terms of the fund. These are commonly known as mutual funds. Equity funds are that category of mutual funds that invest in equity shares issued by companies. Equity funds can be classified into different categories based on the type of equity shares in which the funds are invested. This can include dividend funds, growth funds, small-cap funds, mid-cap funds, large-cap funds, etc.
Risks Associated With Equity Investments
Equity investments are one of the most profitable and return-generating investment avenues. When you invest in equity, you are investing in the company that has issued those equity shares. Therefore, equity investments also come with certain associated risks. This include:
- Market Risk: This is the biggest risk of investing in equity instruments. As equity shares are traded in the market, they are volatile. Multiple factors affect the prices of equity shares like demand (buyers), supply (sellers), political scenarios, macroeconomic factors, government policies, etc.
- Financial Risk:As stated earlier, investing in equity shares means investing in the company. This creates a financial risk for equity investors. If there is a disruption in the profitability or business of the company, then ultimately, its share price will drop, and the shareholders will suffer a loss.
- Liquidity Risk:This shows how easily you can convert your equity investments into cash by selling them at or near their market value. Listed securities are highly liquid as you can sell your shares anytime during trading hours and withdraw your money. However, if you are investing in unlisted equity shares, then you need to consider whether the investment is liquid or not. This is because you may have to find buyers for your shares, unlike listed shares being sold in the stock market.
- Settlement Risk: This can happen when the seller does not deliver equity securities after receiving money, or the cash is not received after delivering the security. Conducting transactions through the stock exchange can help avoid such risks.
- Currency Risk: Investors face currency risk when they invest in equity shares of foreign companies. While your native currency is INR, you can invest in US companies in $. Thus any currency fluctuation will ultimately increase or reduce your gains or losses.
How to Lower Risk in Equity Investments?
To lower risk on equity investments, investors can follow the below-mentioned tips:
- Do thorough research about the company and the industry before investing.
- Activate stop loss to minimize your loss.
- Derivatives like futures and options involve more risk than equities. Therefore, you should trade in them only after obtaining thorough knowledge.
- If you are not investing for a longer term, then timing the market is important. You need to enter and exit the market at the right time to book profits.
Equity Shares Vs. Equity Funds
While equity shares involve direct investment in the shares of the company, equity funds involve investing in multiple equity shares at the same time. This reduces the overall risk as your investment is diversified between multiple equity shares. Further, equity funds are professionally managed by expert fund managers. Thus, new investors can benefit from their expertise. Seasoned investors often go for direct equity investment as they have thorough investment knowledge.
Who Should Make Equity Investments?
Those investors who are looking to earn good returns and have moderate to high-risk appetites can go for equity investments. If you are new to investing world, then you can go for equity funds as they are less risky as compared to direct equity investments. Further, you don’t need to worry much about the selection of stocks as this is handled by expert fund managers.
In a Nutshell
Equity investments are gaining popularity among investors. In today’s time, when inflation is skyrocketing, it is important to invest in avenues that provide above-inflation returns. Traditional investment avenues are unable to meet such high return benchmarks, and therefore, equities are looked upon by investors to grow their wealth. To learn more about investments and finance, check our resources at Jupiter Money now!
Frequently Asked Questions
How can you invest in equity shares?
For investing in equity shares, you need to open a Demat account. You can easily open a Demat account online with a stock broker or any financial service provider.
How to invest in equity funds?
You can invest in equity funds through the following means:
- Demat Account:Demat account also allows you to invest in equity funds.
- AMC: You can invest in equity fund by directly opening an account with the asset management company that owns the fund.
- Agent or Distributor: You can also invest in equity funds through an agent or the distributor.
Whether equity investments are eligible for tax deduction?
Yes. If you invest in Equity Linked Savings Scheme (ELSS) funds, then you can claim a deduction under Section 80C of the Income Tax Act, 1961. The maximum amount of deduction that can be claimed in a financial year is up to Rs. 1.50 lakhs. However, your funds will be locked in for a period of 3 years.
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