Everything you need to Know about Equity Investments
The main objective of every investor is to earn returns on their investments. These returns are either fixed or based on market factors. The returns you expect from the equity investments are market-linked. Unlike fixed return investments that are mainly preferred by beginners, equity investment carries a high level of risk. At the same time, it offers a high rate of returns to investors. In the equity investments, traders buy stocks from the companies listed on stock exchanges. They could also buy shares from small companies. Let’s take a look at the common types of equity investments:
- Shares: The shares make the investor the partial owner of a particular company. Each investor that owns shares of a company will be considered as the shareholder. Investors can buy shares at a low price and sell them at a higher value to generate profits.
- Futures and Options: It enables the trader to purchase and sell securities, but postpone the delivery of the assets.
- Equity Mutual Funds Investment: A perfect option for investors who do not have a lot of knowledge and skills concerning the stock market industry.
- Arbitrage Schemes: An investor can buy and sell stocks on multiple exchanges to leverage the differences in the stock price. It guarantees profit to the investor.
- Alternative Investment Funds
There is no denying that equity and non-equity investments are associated with high risks. The returns are uncertain and it could lead to financial loss if your assumptions turn out to be inaccurate.
Liquidity risk gets the trader to sell the stocks they own at a considerably lower price than the actual market price. These risks are common in the stocks that are sold in low volumes. Investors end up selling the stocks at a low price in order to deal with the financial emergency.
The most common type of risk with equity investment is market risk. As the name suggests, it is used to indicate the potential risks associated with the current market conditions. For example, the recession and slow down economy can have a negative impact on the share market. Note that market risks are not confined to a specific industry or a company. They are considered as the macro risks that affect the share market as a whole.
As serious as the market risk sounds, it opens up several opportunities for investors to purchase stocks at a fair price and earn high returns in the future. That’s one of the reasons why a majority of investors wait for the market recession and slow down the period to make a lump sum investment.
Performance risk is associated with the poor performance of a particular company or a sector. These types of risks affect a particular industry, such as healthcare and banking. You can’t control the performance risks, but it can be minimized by diversifying your investment portfolio. The impact is not as serious as the market risk, but performance risks are quite common in equity mutual funds investment.
Social and Political Risks
Other risks that can affect the equity market are social and legislative risks. These types of risks indicate the downturn in the stock market due to the social and political changes. For example, if the government of a country restricts foreign businesses, then there is a high chance the local business of the company will thrive. This will result in the growth of the company and the value of its shares. On the other hand, if the government lifts all these restrictions, the local business will suffer. As a result, the share value of the companies will decline.
The only way to mitigate the social and political risks is by diversifying your investment portfolio. It is, therefore, important to invest in the shares of different companies.
Is Equity Investment the Best Option for all Investors?
As mentioned before, equity investments are prone to high risks. If you are willing to bear risk, then equity investments make a perfect option. They can bring you high returns in the long run. However, this investment is uncertain. You could end up losing all your investment or a major portion of it if the underlying asset fails to perform well.
If past records are considered, then the equity market has often proven to be a useful tool for long-term investors. If you are looking for a short-term investment option, then the equity market might not be the best option for you. That’s because the market favors investors who stay put during the recession and hard times. Besides that, you need skills and knowledge to be able to ascertain current and future equity trends. You also need to take the market and stock liquidity into consideration before making an investment.
Gill Broking makes your Equity Investment & Trading Experience simple with major exchanges like NSE & BSE.