I know you are in hurry to know what is Equity Share? But let me start with a story – that will clarify all your doubts. During college days, I had joined hands with a couple of my friends to start a business without much capital or too much of a thought. The basic idea was to earn some extra pocket money by procuring fancy shirts/T-shirts from a wholesaler known to us and selling it to friends, relatives and colleagues. The partnership lasted for over two years and in the journey we experienced setbacks, big sales, bad debts, lots of learning overall and last but not the least a share of the profit.
What is Equity?
The underlying principle of partnership is the same as when one invests in equity shares in enterprises (or company) which are organised, transparent, well regulated & run by people and their teams having a cumulative experience of decades in their respective domains. The best part is that you’re just a financial investor without the hassles of day to day management of the business. Holding equities, however small brings you at par with the people who own a large part of the company like the Tata’s, Birla’s, Ambani’s etc. All these for no direct cost to you, but you still avail their expertise for your financial exposure. Owning shares is to have a share in the growth, innovation and wealth that the enterprise creates.
Most individuals are growth-oriented and every company is a congregation of such people who work there. For example, Infosys Ltd employs over 1,50,000 people who aspire for a better salary every year & so add value to their clients, which leads to growth. Today when we hear about the BSE Sensex touching new highs, it’s all about a congregation of such big and established companies run by visionary leaderships and efficient managements.
Why invest in equities?
- To beat inflation
- To create long term wealth
- For Tax effectiveness
- To experience the magic of entrepreneurship, through partnership
- To experience the magic of compounding
Why Don’t Indians invest in Equity?
In spite of such a wonderful opportunity, a very small percentage of Indians invest in equities, which only means as a country we are risk averse. Some factors that hold us back from looking at this asset class are:
- Risk of profit fluctuations in business
- Volatility of the share prices
- Layman’s impression – it is projected as a speculative asset,
- Looked upon as a short-term moneymaking avenue
- Previous bad investment experience of self or acquaintances
We Indians respect many business leaders for their contribution towards the society and they happen to be among the richest in the country. They are so because of their holdings in some successful company/ s which they have founded, nurtured and run efficiently for a long time like Azim Premji of Wipro, Ratan Tata, Narayan Murthy or Bill Gates of Microsoft. We shy away from even investing in companies managed by such icons.
Some basic traits required to be an equity investor are:
- One needs to understand the nature of risk in equity investing. Risk is all around, while walking on the street or having chaat (Bhel, paanipuri etc) on the roadside or engaging in a mobile chat while walking downstairs and many more. There is always a probability of loss. It’s all about understanding & mitigating risks.
- Patience is the key, since it is a boring activity, doing nothing after investing for a long, long time. It is like attempting to watch the grass grow. There is no magic formula.
- Long term view, i.e. over ten years
- Understanding businesses and their behaviours.
- Inclination & the time to manage the investments, eg annual reviews
- The stomach for a roller coaster ride, understanding that volatility is not RISK
- High returns brings high volatility and low volatility means low returns
- They are volatile in the short term, which eventually reduces with time
- RISK arises when we surrender to volatility and most of the times we misunderstand volatility for risk.
- Behaviour plays a vital role when it comes to investing here. We operate out of greed and fear, withdraw when there’s panic and invest during euphoria and end up burning fingers being part of the herd. Remember “You pay a very high price in the stock market for a cheery consensus.” – Warren Buffett.
Ideal process to be followed while investing
- Define goals
- Know your risk appetite
- Do Asset allocation
- Allocate time to manage money
Check – The Art Of Financial Planning
Investors can invest in Equities in a couple of ways:
- Directly as investors in the shares of high quality companies, understanding businesses, tracking performance at regular intervals like sales, growth, PAT, ROE etc
- Through Equity mutual funds, which professionally manage investor’s money for a fee. Investing here no way gives the freedom to assume that life will be hunky dory, since one still needs to understand that the risks still prevails and the behaviour needs to be managed. It only means a professional is in the pilot’s seat to take us to our destination for which we have boarded, face the weather outside and decide the course of action ahead i.e. do the course correction.
In today’s world on an average normal individual works for around 10 hours a day for approximately 250 days a year i.e. 2500 hours, but doesn’t even allocate 25 hours a year towards the deployment of his surplus funds. It is earning money vs. managing money challenge.
Mutual Funds or Direct Stocks
To conclude investing in Equities directly is a great idea provided one has the understanding of the whole process of identifying high quality companies with good managements, evaluating them on various parameters like finance, industry prospects, the changing trends etc. And the preparedness to allocate enough time to identify and further track each of those companies individually, as Malcolm Gladwell talks in his wonderful book ‘The Outliers” about 10000 hours of hard & focused work. Otherwise it can prove lethal i.e. instead of beating inflation; it can wipe out the capital invested.
On the other hand Equity, mutual funds eliminates that painful process and takes over the botheration of identifying companies and monitoring them. It is basically outsourcing to a professional who has also experienced the roller coaster rides and has successfully overcome it. Here an adviser too can come to the rescue by assisting in identifying the right fund house, managers & ultimately the schemes based on the goals, risk appetite etc. In short an adviser walks the investment journey with the client.
The underlying asset is one and the same; it is for the investor to choose, what’s appropriate.
Share your view in the comment section.