Equity investment or you can say investment in stocks or shares, is an asset class which is generally considered risky investment by the retail investors. But there are many advantages of investment in equity, which makes this asset class apex of all other investment avenues. But like all good things come with some disadvantages also, there are certain cons of investing in equities. For new investors, who are embarking their journey of investing, it is crucial to understand the pros and cons of this asset class, so that they can make best investment decisions. Let us explore more about equity investment, in this post.
Advantages of Investing in Equities
Liquidity
This is one of the biggest advantage of investing in equity. You can enter and exit in equities any time. If you need the fund immediately, you can sell your shares or mutual fund units immediately and the fund will be credited to your account within three days’ maximum. Hence equity funds are highly liquid as compared to any other asset class.
Easy Diversification of Your Funds
Unlike in other asset classes, where your fund is invested in only a single entity, you can divide your fund by investing it in various stocks or mutual funds. Mutual funds further diversify your fund by investing it into several companies. Thus the diversification helps protecting your fund against loss because if shares of some companies do not perform well, other stocks may compensate the losses.
Less Transaction Fee
If you buy or sell stocks or mutual funds, stock brokers or asset management companies charge a very small percentage of buying or selling price which is negligible if you compare it with other asset classes, such as real estate.
Capital Gain
The market price of good shares increase over time if the businesses perform well. This provides you capital gain on your investment.
Dividend Income
When a company pays its profit among stakeholders then it’s called dividend. Dividends are paid on regular basis by the companies (generally paid annually) and due to this the investors get a regular income in the form of dividends. The mature companies distribute their profit among the shareholders while the companies which are at growing stage, decide to utilize the profit for further growth of the company. So, for dividend income, the investor should invest in dividend paying companies. Some of the best dividend paying companies are ITC, ONGC, NALCO, HUDCO, SAIL, GAIL, Oil India, HPCL, RITES, BPCL, etc. s
Disadvantage of Investing in Equities
Not Suitable for Short Term
Equities are not for short term. If you have capacity to hold your investment for at least 5 years, then only it is advisable to enter in this asset class. The more is the time period, the more will be the capital gain from equities. The investors, who have created wealth form equities, remain invested for very long period. If your aim is to make investment for a short period, then this asset class is not for you because equities may give negative returns in the short term. Investing in bonds is suitable in short term.
Also read: Corporate Bond Funds, their Features and Benefits
High Risk
This is a risky asset class. There are many things which decide the price of shares. If the business will not do well, the value of their shares may go down. You could lose your entire investment. If you can’t afford to lose your investment, then you should buy bonds.
Limited Control
You do not have much control over businesses because they are run by others. Also, the price of stocks depends on many factors which are beyond your control. Overall economic condition or sentiments are also contributing to the rise or fall of the price of stocks. All these things make this asset class very risk.
Requires Knowledge and Research Before Investing
Investing in equities require knowledge of shares, businesses etc. You need to research a lot about the company and the stock before entering into it. Continuous adaption about the performance of the company and market conditions is very much required. Therefore, equities demand your attention and time. If you are willing to learn and invest time along with money, then only you should invest in equities.
Emotional Roller Coaster
A lot of fluctuation is seen in the prices of stocks during the investment cycle. The investors often make wrong decision in these situations. Individuals tend to buy at high price due to greed and sell at low price due to fear of losing money. So you should be emotionally tough, if you want to gain from equities. The best strategy for this is not to check regularly for the prices of shares but to invest mechanically. It means that you should choose stocks of some good companies and invest in them regularly, without being affected by the pries of the shares.
Competition with Professionals
Institutional investors and professionals have better knowledge and more access to the information then individual investors. They also have latest trading tools, technologies, financial models and computer software at their disposal. So due to all these advantages, they may reap the profit before the individual investor try to grab it.
Taxes
If you sell stocks in loss, then there is no tax on the equities, but if you sell them in profit, then you will have to pay capital gain taxes.
Conclusion
Equity is one of the best asset class for creating wealth. Its various advantages outweigh some of the disadvantages. However, the perception regarding this asset class is opposite to this. Equities are considered risky but if the investment is made by due diligence and with patience, then this is the best asset class to grow your wealth. The keys to make good returns from equity are:
- To choose good stocks
- To remain invested for long term
Investing in stocks require ability to learn, ability to take risk and patience. If you are willing to embrace these qualities, then this is the best asset class for you to grow your wealth in the long run.
