Equities or stocks are often the foundation of investments because they give the public opportunities to key into corporate profits. However, not everyone is knowledgeable about them. This article details essential things you should know about investing in equities whether you’re just starting or already on your investment journey.
Jump to:
- What are Equities?
- How Can You Invest in Equities
- Benefits of Investing in Equities
- Disadvantages of Investing In Equities
- Equities and Dividends
What are Equities?
Equities can also be referred to as stocks and shares and are often used interchangeably.
When you buy a share, you are taking/owning a small part of the company. And as a shareholder, you are entitled to receive dividends from the profits that the company earns.
Equities are usually traded on a stock exchange and share prices fluctuate with supply and demand.
How Can You Invest in Equities
There are two primary methods to invest in this asset class: directly or indirectly through mutual funds.
Direct Stocks Investments
Here, you need to open a trading account and a Demat (dematerialisation) account if you want to invest directly in stocks. The trading account is where you place buy and sell orders with your stockbroker, while the Demat account stores your shares electronically.
Here are some benefits of investing directly:
1. Possibility of high returns
Making the right choice of stocks can bring substantial rewards. Besides that, your ability to buy and sell at the right moment is absolutely necessary for success.
2. Wide investment opportunities
You can select from a wide range of equities when you choose direct equity investment. Invest in a large-cap, mid-cap, or small-cap corporation stock based on your risk appetite.
Equity Mutual Funds
Mutual funds have been one of the most widely used financial strategies for accumulating assets for a variety of life goals over the years.
Here are some of the key benefits of investing in stocks through mutual funds:
1. Portfolio management
While direct stock investing requires more professional expertise, the fund manager selects equities and places a call on your behalf when dealing with mutual funds.
In addition, the manager does research, monitors market trends, and acts in the best interest. In summary, you get to benefit from the fund manager’s experience.
2. Diversification
Your investments are diversified with mutual funds across several industries and sectors. This reduces the level of risk attached to equity investing.
Risk is evenly distributed thanks to diversification. Though economic events can impact different industries in different ways, you are assured that if a few companies fail, others will succeed.
For long-term success, diversity should be the best option.
Learn more about diversification in investing.
3. Low initial fees
Mutual fund investments typically come with a small ticket size. To put it another way, at Cowrywise, you can start investing with as little as N1000 for Naira mutual funds and $10 for Dollar mutual funds.
Then, you can steadily grow your investment through a Systematic Investment Plan (SIP). This will help you create a sizable fund reserve and gradually build wealth.
4. High liquidity
Mutual funds have a lot of liquidity. If you ever happen to be in a serious financial emergency, you may quickly withdraw the same into cash. Subject to exit loads, if any, the money is credited to your account within 24 – 48 hours after you submit a redemption request.
Benefits of Investing in Equities
Knowing your risk tolerance and balancing the level of risk involved in your assets is essential. Equities have excellent potential for maximising profits. However, you must be prepared to assume the necessary risk, which can be anywhere from moderate to high.
Here are the benefits of investing in equities:
Capital growth
If a company’s share prices go up and you sell them, you make more money than you initially bought.
Income
Some people invest in equities because of income; this is because many companies pay out part of their profits to shareholders in the form of dividends.
Financial stability
Equities can provide you with financial stability, especially for investors who want both income and growth.
Less risk of inflation
Equities can protect the real value of money from inflation over the long term. But as with every investment, higher returns mean higher risks.
Expert management
Fund managers with extensive expertise in mutual funds keep an eye on equity funds. They are knowledgeable about every facet of mutual funds. They analyze the markets and adjust investments as needed to take advantage of market movements.
Ownership
When you purchase shares, you become a shareholder in the firm and benefit from a portion of the profits. You also have voting rights within the business.
Disadvantages of Investing in Equities
Time-consuming
If you are buying stocks on your own, you must research each company to determine how profitable you think it will be before you buy its stock.
In addition, you must learn how to read financial statements and annual reports and follow your company’s developments in the news.
Uncertainty
These instruments are also regarded as high risk because there’s no certainty of what their performance will be from year to year.
Preferential treatment
Preferred stockholders, bondholders, and creditors are paid first if a corporation goes bankrupt; common investors are paid last. However, this only occurs when a business declares bankruptcy. But, a well-diversified portfolio would keep you safe if any company fails.
Volatility
Stock prices fluctuate frequently. People frequently sell cheap out of fear and buy high out of greed. The best action is to check in occasionally rather than continually monitor stock price changes.
Find out more about emotion-based investing.
Economic concentration risk
If a corporation is overly reliant on a single entity, industry, or country, its value may decline (putting all its eggs in one basket). If any of these factors’ value drops, the company may suffer significantly.
Equities and Dividends
Equity is a person’s ownership in a company or other important business asset. A dividend is a payment made to shareholders for their investment in a company (usually paid from the company’s net profits).
The purpose of a company is to make a profit for its shareholders and dividends are the way a company pays out profits to shareholders.
Dividends are basically the financial reward of investing.
Bottom Line
Equities are, by nature, unstable. Several internal and external factors, which are beyond retail investors’ control, affect their prices.
Extreme price fluctuations can occur; when they do, you must maintain patience. You should have a long-term approach to investing. A way to mitigate risks is to invest in a range of equities through an equity fund (diversification).
Whichever investment route you choose, ensure you understand your risk tolerance and take expert advice on the best decision for you.
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