Equity Shares

Benefits of investing in Equity Shares

1.   Ownership

Investing in shares of a company makes you a shareholder or a member of the company. In simple terms, you get ownership of the company and can exercise control. As an investor, you would enjoy a share of the income earned by the company. Additionally, you would also get voting rights in the company.

2.   Higher Returns

The primary advantage of investing in equity is that it can generate high returns in a short time in comparison to other investment options like Bank FDs. Presently, the equity market is reaching all-time highs as it recovers from the Covid-19 setback of 2020. With appropriate stock picks and a solid trading strategy, the stock market can potentially provide you with unparalleled returns going forward.

3.   Dividend

One of the benefits of investing in equity is that it offers returns in not just one, but two forms — capital appreciation and dividend income. A dividend is a distribution of surplus profits by a company to its shareholders. Dividend income is essentially an additional income to the investor.

4.   Limited liability

There is always a risk of adversity when it comes to companies such as bankruptcy or operational losses. However, your liability as a shareholder or investor is restricted to the amount of investment you’ve made, and not a penny more.

5.   Liquidity

Stocks are generally considered liquid assets. The shares can very easily transfer ownership. The average daily volume of transactions on NSE and BSE is considerably high. This means several buyers and sellers are participating in the market at any given point of the day.

6.   Beat inflation and facilitate wealth creation

Inflation is one of the major constraints to wealth creation. The rate of return on your investment should ideally be higher than the inflation rate. The inverse case would result in wealth erosion. Investing in equities allows you to earn a high return rate that can potentially beat the inflation rate by a large margin. This is how equities facilitate wealth creation in the long term. History is proof, stock indexes have consistently outperformed return on debt and other investments instruments in the long term.

7.   Right shares and bonus shares

When a company requires additional capital, it can issue ‘rights shares’. A right issue ensures the preservation of ownership and control of existing shareholders, and they receive priority to invest, over other investors. Right shares are issued at a price lower than the market price of the company’s share. So, existing investors can take up this advantage or otherwise renounce such rights.

Sometimes companies decide to issue bonus shares to their shareholders. Bonus shares are essentially free shares that are given to existing shareholders. Often, bonus shares are issued instead of dividends.

8.   Flexibility

An investor looking to make an entry into the stock market can start with a rather small investment. Purchasing the stock of small-cap or mid-cap companies in smaller units would be the apt way forward. Another great benefit of investing in equity is that you can buy, sell or hold shares whenever and for however long you prefer.

9.   Tax advantage

Equity investments offer tax benefits. Long-term capital gains (LTCG) up to Rs. 1 lakh from equity investments are exempt from tax. Otherwise, LTCG of above Rs. 1 lakh is taxed at 10%. Short-term capital gains (STCG) from equity investments are taxed at 15%. The return earned on debt or gold invites a higher tax obligation than equities do.

10- Diversified investments

A general rule for investing is to diversify. The common adage is – “don’t put all your eggs in one basket”. Diversification helps reduce risk concentration associated with a particular investment instrument. Equity investments deliver an acute edge by diversification. Stock market fluctuations are independent of other investments such as bonds and real estate. Adding stock to your portfolio means greater risk but it also delivers sizable and rapid gains. This can also assist you, as an investor, to avoid overly conservative investment strategies.