Investment in the stock market has become one of the most widely opted investment options in India. People invest in shares and various other securities in the stock market, aiming to earn profitable returns from it. One such security is equity shares that companies offer to investors to meet their long-term business expenditure. Investors are offered to hold stakes of a company in the form of equity shares. When the company gains profit, it is distributed among those shareholders in the form of dividends. However, like many investments, equity investment comes with some risk factors. From what equity share is to how to invest in such shares in order to earn guaranteed returns, learn everything here, with LKP securities.
Which equity share should you choose?
Before knowing how you should proceed to invest in equity shares, it is necessary that you know what kinds of equity shares are available for purchase in the market as it will aid in deciding which type of shares to invest in.
Ordinary equity shares
Ordinary equity shares or common equity are offered by companies through Initial Public Offering(IPO) for accumulating funds required for funding long-term expenses. When you invest in ordinary equity shares, you become the owner of a part of the company you hold shares of. You will also have voting rights in the company’s decisions.
Preference equity shares
As the name suggests, investors owning preference equity shares enjoy some preferences from the company they invest in. Companies promise to pay the cumulative dividends to the preference equity shareholders before it gets distributed among ordinary shareholders. However, if you own such a share, you can’t avail any voting rights or membership rights in the company.
Bonus equity shares
If you invest in bonus equity shares, the profits of the company will be forwarded to you in the form of additional stakes in the company. It reflects capitalisation of extra funds that have been generated due to production.
Rights equity shares
Rights equity shares are only offered to premium investors. Such shares are provided at a discounted price. Companies sell such shares only for a specific period for raising capital to meet the expenses needed to be borne.
What will you require for investing in equity shares?
There are certain things that are mandatory for you to have if you want to invest in equity. These include some necessary documents, Demat and trading accounts and a linked savings account, all of which are elaborated below.
There are some documents that you would require to start investing in equity shares. The most commonly needed documents are as follows:
It is mandatory for you to have a valid PAN card for investing in the share market.
You will need to provide identity proof and address proof for which your Aadhaar card will suffice.
You also need to provide proof of income by giving bank statements or passbook or cancelled cheque from your bank account consisting of your name on it.
Lastly, you will need passport size photographs.
You will need to submit these documents to your broker during the KYC procedure.
Demat and trading account
For equity investment, first, you must open a Demat account and a trading account with the Securities and Exchange Board of India(SEBI) through your selected broker. The Dematerialised or Demat account will reflect the shares that you hold while the trading account will be used to buy and sell shares. Most banks offer Demat accounts to investors. You can open a Demat trading account with any Depository Participant(DP) registered with SEBI. Since you can’t physically hold or transact in shares, so you need these accounts for investments in shares.
Linked bank account
You would need money to purchase common equity or other types of equity shares in the market through your trading account. For that, it is necessary to have a bank account linked with your trading account so that you can transfer money to the trading account for the transaction. Also, when you sell shares, you may withdraw the money and credit it to your linked account.
How to take the final decision?
Once you have opened your equity trading account and linked the savings account with it, you will be all set to start investing in equity shares. However, there are a number of factors that you should keep in mind while investing in such shares as otherwise you might conduct a haphazard investment and end up failing to gain the desired return. The things that you should consider while opting for equity investments are given below.
Understand your financial aim and risk tolerance capacity
Before investing in equity shares, it is important to set your financial aims. Whether you want a long-term investment or you want to save and earn to meet any specific goal such as a world tour, marriage, etc. You must also understand how much risk you can bear without affecting your survival. If you invest in a popular company, the share prices will relatively stay stable. In a small company, the share price is likely to go much higher with every achievement but crash down with a slight failure. Thus, knowing your goals and risk-bearing capacity is necessary to decide how much you should invest and in which company.
Invest through a reliable broker
As investing in equity shares can be quite tricky and is a risk-oriented investment, it is advisable to invest through a broker. You can get an expert’s perspective and guidance if you invest through a broker as they have a thorough knowledge of the cost of common stock equity, the performance level of companies, market fluctuations, etc. Make sure that you choose a reliable broker as otherwise you may get cheated on by a fraud agent.
Research about companies
Firstly, research about the companies available in the market. Generally, companies that are well established are likely to be able to bear economic fluctuations well. The prices of their shares are not likely to fall drastically. New companies might face a boom at a specific time. However, it is very risky to hold shares of such companies as any slight failure can bring down the prices to a considerable low. Thus, as an equity investor, it is advisable that you research about the performance of the companies and purchase shares accordingly.
Diversify your investment portfolio
If you want to guarantee higher chances of return, it is always better to invest in multiple equity shares of varied companies. It helps alleviate the risk of losing your investment. If due to any unforeseen incident, one company fails, you can still earn dividends from other companies if you own their shares.
Keep track of your shares
Even if you invest through a broker, it is important as an equity investor to keep track of the shares you own as well as shares available in the market. This will help you manage your investments by selling out shares when their prices soar high and purchasing shares at its lowest available price. You can also cut down your losses by selling off shares that are not performing well before their price falls further.
If you keep these things in mind while investing in equity shares, you can most likely gain attractive returns on investment. You just need to purchase the preferred equities through your equity trading account and keep tracking the cost of common stock equity and other equity shares to manage your investments accordingly and maximize the potential returns.