What are the Benefits of Investing in Equity Shares?

With the passage of time, the number and types of investment avenues available in the capital market have evolved. There are, however, some financial assets that have been a prominent part of the market since its inception, and equity shares are amongst those. In this article, we shall delve into the myriad of benefits of investing in equity shares which have helped them retain their spot as a popular investment option. 

What is an Equity Share? 

An equity share is a part of the share capital of the issuing company. As such, when you buy the equity shares of a company, you become proportional owners of said company. With the purchase of an equity share, you can effectively participate in the growth of the company both by way of capital appreciation in the market and enhancement of market standing and the periodical payout of dividend (if any). Investment in equity shares comes with its fair share of risks as well, for instance, reduction in market value and no certainty of any return on the investment. 

Major Benefits of Investing in Equity Shares 

Before choosing to invest in the equity shares of any listed company, you must carry out adequate research to assess the past financial and operational performance of the company, its growth trajectory over the years, and comparison with industry peers. Furthermore, you must check the qualifications, experience, and credibility of the top management and promoters of the company since they are instrumental to the company’s future prospects. Here are the key benefits of investing in equity shares.

• Potential for Capital Appreciation

If you determine your equity share investments after due research, you can be better placed to invest in companies with long term stability and high potential for capital appreciation. When a company performs well, the demand for its shares in the market increases, which, in turn, causes a rise in its price (and market value). The longer you hold onto your investments in such stock market , the higher the potential for capital appreciation and significant return on investment. 

• Dividend Income

While the gains from the capital appreciation of equity shares can be attained only after the liquidation of the investment, there is another way to earn substantial income from equity shares. When companies register net profit during a financial year, they may choose to declare a part of said profit as dividend for shareholders. A steady stream of dividend income can increase your return on investment. 

• Diversification of your Investment Basket

Since you can invest in the equity shares of companies across several sectors and capitalisation levels (large cap, mid cap, and low cap), you can effectively diversify your investment basket. Should one sector perform below expectations over a particular time period, the other sectors may perform well, thereby reducing your overall risk exposure and the volatility of your investment portfolio. 

• Hedge Against Inflation

Since the market value of equity shares can be checked on a real time basis, you can assess tour return on investment whenever required. Investments in equity shares carry moderate to high risk and potential for high gains. Therefore, the return on such investment is likely to be higher than the inflation prevailing in the country. The same cannot be said for several other financial assets whose returns often fall below the rate of inflation and the net return on investment is in the negative. 

The Bottomline 

An investment in equity shares is marked by a high degree of volatility, risk management, and uncertainty. In the same vein, however, the potential for capital appreciation is substantial, particularly in the long run. You should carry out due diligence before adding equity shares to your investment portfolio, and consider the wide array of risks and benefits such an investment entails.