What is Equity Investment and Benefits of Equity? - Upstox (2024)

When we talk about equity, the term can hold different meanings, depending on the context and type of assets. Equity in general terms is the degree to which you own an asset, after all the debts associated with that particular asset are paid off. So when you buy shares of a company, you are doing an equity investment in that company. In this section, we will go into the details of equity, equity investment, advantages of equity investment and, how to invest in equities.

A lot of people want to learn about equity investment and execute it, especially in India. You can also invest in equity with a little bit of knowledge which you will get here.

What is equity?

Equity is nothing but ownership; ownership of anything, actually. Let's suppose you own 10 shares of a company XYZ, which has 100 shares in total. You will then be a 10% owner of the company. So, if this company makes a profit, your capital investment will rise and vice-versa.
There is a simple mathematical formula to calculate equity:

EQUITY = ASSETS - LIABILITIES

What is equity investment?

When you buy and hold a share in a company, the act is known as an equity investment. It’s called an equity investment since shares are ‘equal’ ownership avenues into a company - each share being equal to the other.

When you buy common stocks of a company from the share market, you are partially an owner of the company. When the company earns a profit, you get income from dividends and capital gains. When the company makes a loss, you will also incur a loss. Equity holders receive voting rights, meaning you will have the right to participate in the decision making process of the company.

Advantages of equity investment

• Capital Gain, income and dividend: When the share price of the company rises or the company makes a profit, you will receive a return on investment in terms of capital gains and dividends: these are the 2 main sources of income on your investments.
• Limited Liability: The liability of your shares is limited to the extent of the investment made in a company. When the company incurs loss above your investment, you don’t have to bear that loss.
• Exercise Control: When you own shares of a company, you gain ownership of that company. This gives you voting rights in the company.
• Bonus shares: On some occasions, companies decide to issue bonus shares to its existing shareholders. These shares are free shares which you receive.
• Liquidity: The shares you buy in a stock market have high liquidity. This means your shares can be easily transferred to a different owner. Contrast this with a real estate investment, which would be significantly more difficult to transfer.
• Stock Split: Sometimes, companies decide to split their stocks into parts. This reduces the share price of the company but your capital holding remains the same. The major advantage of this is that it increases the liquidity of the share.

How can you invest efficiently and safely in equity?

• Make sure you’re doing your research before you dive into the stock market.
• Keep a track of the profit and loss accounts, analyse balance sheets and cash flow statements of the companies you invest in.
• You should keep a track of your portfolio on a regular basis, and make sure it is diversified. Don’t put too much of your money into one company.
• Due to the volatility of the share market, remember to make smart decisions about when to buy/sell.
• Lastly but most importantly, you need a demat account and a trading account.
• Learn how to open a demat account and how to open a trading account .