Equity Shares: Overview, Reasons To Invest, Merits & Demerits

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When a company decides to raise funds one of the ways in which it does so is through equity shares. An equity share is represented as a unit of the company’s market value. They are divided into equal parts, and if you purchase a unit of that share, you become an owner of the company. The profits earned by the company will eventually be distributed among the shareholders in the form of dividends. 

Why Should You Invest in Equity Shares?

There are several reasons why you should be investing your money in equity shares. Some of them are as follows: 

Small Capital 

You do not need to have a lump sum amount to start investing in equity shares. Depending on the price of the share which could be anywhere from Rs 10 to Rs 10,000 or even higher, you can invest. This makes equity shares one of the most feasible options to invest in. Any person no matter what his financial background is can take advantage of this form of investment. 

Better Returns than FD

Many people consider Fixed Deposits to be the safest option out there which is indeed true. But the problem with Fixed Deposits is that their rate of return is not that good. In fact, many times the rate of return of FDs is lower than the rate of inflation. Shares, on the other hand, are quite promising in this regard. The returns, in the long run, are generally much more lucrative and definitely better than that of the FDs. 

Advanced Computation Method 

People invest in equity shares because their rate of growth is not as static as it is FD which increases at a fixed rate. Shares on the other hand follow computation methods such as compound interest and capital appreciation, which takes the initial principal amount to a much higher level after some years. This is something which you will find in FDs, gold investments or even in mutual funds, etc. 

Merits of Investing in Equity Shares

There are several advantages of investing in equity shares. Some of them are as follows: 

  • Equity shares are highly liquid. If you invest in gold or Fixed Deposits then you can convert your investments into cash immediately. But this is not the case with equity shares. You can sell your shares anytime and get a cash amount in return for it. 
  • The returns you get in equity shares are much higher compared to other forms of investment. If the company whose shares you have purchased is doing really well in the market, then in a matter of a few years you can get a substantial return on your investment. 
  • Equity shares are one of those investments that can act as a hedge against inflation. The rate at which inflation is rising, traditional forms of investment such as Fixed Deposits cannot work as well as equity shares can do. 

Demerits of Investing in Equity Shares

As it is with all things, there are some drawbacks of equity shares as well. They are as follows: 

  • Equity shares are highly risky. They are quite volatile and a lot of their performance depends on how the market is going. If the market falls, the value of your shares will also fall and you might lose out on your investments totally. 
  • Although dividends are high paying, they are not guaranteed and it totally depends on the profit the company is making. 
  • When the company is winding up, it is the equity shareholders who are the last ones to gain anything. In case, the company does not have enough assets for the shareholders, the latter tends to lose out on their investment. 

As it is evident, equity shares give great returns but are also very risky. So, before investing in any equity share you should make it a point to know well about the company and the type of share you are buying. And once the investment is made, it is always better to keep it for a long time as it is when the investments start to make great profits.