What are equity investments?

Vicentiu Vlad

August 15, 2022

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For new investors, foraying into the equity market can be a challenging experience. The entire stock market is a complex entity, but once you understand all the rules it functions by, you will find the best investment opportunities to make your money grow. And the first step for achieving the investor's financial goals is to understand the basics of equity investment.

What are equity investments?

The simplest way to understand the equity investment is to see it as fundraising activity, started by a company. Basically, instead of choosing a business loan, a company can collect money from the general public. In this way, the investors can buy a partial share of the respective company, and this is ultimately what’s known as an equity investment. Once shares are purchased, the investor will receive a dividend of the profits earned by the company. An equity investment is an amount of money that is invested in a company by purchasing shares of that company.

Why you should consider equities

The equity investors purchase shares of different companies, with the expectation that their value will rise in the form of capital gains, and they will generate capital dividends. In this way, if an equity investment rises in value, the investor would receive the monetary difference if they sold their shares, or if the company's assets are liquidated and all its obligations are met. Equities can strengthen a portfolio’s asset allocation by adding diversification.

Investing money or capital is a major decision in anyone’s life. The whole idea behind investing money is to create an additional source of income and to generate a sizable amount of wealth for your future that grows overtime and appreciates in value. It is therefore important to understand the first steps of this arduous yet rewarding journey.

It is important to understand your investor personality. For example, you can ask yourself what kind of investor you want be and how much risk are you willing to take. Answering these questions will help you decide what kind of investments you want, and more importantly, it will help you to envision your long-term wealth goals.

If you are a first-time investor, it is better to work on a plan that focuses on your short and long-term financial goals. This investment strategy will help you to align better your needs and goals. Also, investing is only possible with discipline in other areas of your financial life such as monthly savings. After making an investment, some people feel comfortable and forget about it. But, for someone new on this market, it is important to track how your investments are doing.

Now that you know what equities are, let’s understand the various benefits that equity investment brings to the table. A potential benefit is the inflation-beating returns in the long run. With time, the inflation brings down the value of money, so you need to invest in an asset class that has the potential to trounce inflation. Another benefit is the capital appreciation. If you invest in an equity share of a company with high growing potential, its price might appreciate with time. And the investors will benefit from this capital appreciation.

There are also some risks when it comes to investment in equities. For example, the price of your holding can fall, and if you sell at that time, you might incur a loss. But if you are a long-term investor the risk becomes lower.

The secret is to invest for the long term and to diversify your portfolio. Hold shares of different types of companies across industries.

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