Equity
With Equity Investment, the investor can earn through Capital Appreciation over a period of time.
An Equity Investment is typically the money that is invested in a company through purchasing its shares in the stock market. Equity represents the shareholder’s stake in the company which is also listed in the Balance Sheet of the company.
What is Equity?
Equity means the amount of capital that is invested or owned by the owner of a company. The difference between Liabilities and Assets is evaluated from the balance sheet to determine the Equities. In the context of the Stock Market, Equity can be described as the shares in a company’s ownership. When an individual invests in a company’s equity, he becomes its partial owner. Equity shareholders are considered to be the true owners of a company.
Types of Equity
Anyone who wishes to invest in Equity must first learn about its types.
Authorized Capital can be defined as the amount of capital that a company issues. The Authorised Capital Limit can be changed as per the permission from respective authorities to pay fees.
Issued Share Capital refers to the part of Authorised Capital that a company offers to its shareholders.
The part of Issued Share Capital that investors agree and accept is known as Subscribed Share Capital.
From the Subscribed Capital, whatever part is paid by the investors is known as Paid Up Capital. Primarily the paid-up capital is the invested amount of capital in business by the company.
The company sometimes issues Bonus shares to the existing investors in the form of dividends.
When you invest in a company’s equity shares, the company may issue further shares to you. Such shares are meant to be right shares. Right shares are issued to protect the interests and ownership of the existing investors.
To reward hard-working employees and directors for their dedicated service to the company, the company may issue the Sweat Equity shares as a reward.
How to calculate the Book Value of Equity?
In accounting, Equity is listed at the book value. It can be determined by preparing the balance sheet. Calculation of a Company’s Equity can be done with the following formula :
Total Assets −Total Liabilities = Shareholders’ Equity
Example: Company X’s Total Assets are 3,50,000 Rupees. Total Liabilities = 2,50,000 Rupees
Hence the Company’s Equity will be:-
Total Assets −Total Liabilities = Shareholders’ Equity
3,50,000 – 2,50,000 = 1,00,000 Lakh Rupees
How to calculate the Market Value of Equity?
In the world of finance, Equity is generally expressed as a market value that may differ from the book value. For a Public Company, calculating Equity is quite easy.
Market Value of Equity = Equity Share Prices x No of Shares
Example: The price of Company X’s share is 80 Rupees and it has issued 1500 shares.
Hence the Shareholder’s Equity Share Capital will be = Share Prices x No of Shares
80 x 1500 = 1,20,000 Rupees.
Advantages of Investing in Equity
There are several benefits that you can get as an equity share investor. Some of them are:-
- Higher Returns – Equity investments not only provide higher returns but also a chance for wealth creation and capital appreciation.
- Easy Investments – The overall process of investing in equity is really easy. The investors can seek the help of a financial planner or stockbroker for the same.
- Limited Liability – In the case of company liquidation, Equity Shareholders enjoy the benefit of limited liability.
- Protection against inflation – Equity share investments allow the investor to get higher returns over time. The rate of return is often more than the depreciation in his purchasing power due to inflation. Thus investments in equity can shield the investor from inflation.
- Diversified Investment Portfolio – Investors stick to Debt instruments for investments because of the low-risk element. But Debt instruments also generate low returns. However, if an investor wishes to earn higher returns, he should opt for Equity investments.
Why Should I Invest in Equity Market?
Individuals have financial goals in mind which motivate them to start investing. But the choice of investment instrument may make or break their financial goals. A number of factors like Risk Level, Market Volatility, Investment Amount, etc come into play before you choose the investment method that is right for you.
If you have been already investing in Fixed Deposits, you must know that it becomes difficult to protect your wealth if you fall in the highest Tax bracket. On the contrary, if you choose to invest in equities, the average rate of return is 12% annually. Equities can help you against inflation over a long period of time.
Ex- You purchased an equity share at 380 Rupees. With the passage of time, its price went up by 450 rupees. Hence you can now earn a profit of 70 rupees by selling that share.
Equity has the potential to yield higher returns over the long term. However, it is essential that you calculate your risk appetite before entering the stock market.
FAQs on Equity (Frequently Asked Questions)
By investing in equity shares you can earn profits through capital appreciation. The gains on shares can even go as high as 100 percent or more. But capital appreciation is not guaranteed.
By opening a Demat account with a broker firm. They can guide you professionally on how to invest in the share market.
Some Equity Investment Examples are:-
- Equity shares of a public company
- Venture Capital Investment in Startup
- Owner’s personal investment in his business
- Private Equity investments in mature companies
- Acquiring a stake in another company through a merger
The investor can earn capital gains by selling the equity shares after a holding period of one year or more. The capital gains of up to 1 Lakh are exempted from the taxation.
Long-term Equity Investments can help the investors to get the benefit of Rupee Cost Averaging. Due to Market Volatility, your investments may fall in value and incur losses. Also, returns on equity funds are never guaranteed.
Stocks are generally risky as compared to bonds and fixed-income funds due to market volatility. But equity investments also work on the principle of – Greater the risks, greater are the returns.
Yes, you can invest in the stocks of companies that are trading below the share price of 100 Rs.
Market Value of Equity can be calculated by multiplying the total shares issued by the company by the current share price. The market value of equity shares may changes throughout the day as the shares prices fluctuate.
Equity investments can benefit you in the following ways:-
- Capital Appreciation
- Diversification of Investments
- Financial Growth
- Higher Returns
Any contract abiding by the law that proves interested in the assets of a company or firm after deducting the liabilities is known as an Equity instrument.