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What Is Equity?

8 Jan 2016 | 13:00PM

 

One of the benefits of trading in the share market is that investors can become partial owners of a company. These shares, offered by companies in return for money, are called equities. In the Indian stock market, equities are available for trading at the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

An equity market, also known as the stock market, is a platform for trading in company shares. It is the place where buyers and sellers meet to trade in listed companies. Listed companies are those entities that have offered some part of their equity to public investors.

Understanding an Equity

Equity consists of funds that shareholders invest in a company plus a certain amount of profit earned by them that is retained by the company for further growth and expansion.

Equity is a primary asset class when it comes to investing and diversifying one’s portfolio. Trading in equity needs in-depth analysis and research of the share market, services that Angel Broking offers to all of its investors. Additionally, derivatives allow equity to diversify beyond just shares into securities such as bonds, commodities and currencies.

Trading Equity

Equity may be traded in the primary market, when a company makes an Initial Public Offering (IPO) and new securities may be bought. Shares that have already been issued are bought and sold in the secondary market. Investors may also own private equity, that is, shares of a company that is still private and not listed on the bourses. In order to trade in equities, investors must have a demat account and trading account, and Angel Broking offers both of these.

Benefits of Equity

  • Share market investments, in comparison to other types of assets, have given one of the best returns during inflation. This enables investors to maintain their current lifestyles without cutting costs even when the prices of goods are steadily increasing.
  • Equity, while being a risky investment, offers higher returns than a savings account or a fixed deposit because the profit that may be earned is virtually unlimited
  • It is possible to minimize risks and maximize profits through the use of equity derivatives, specifically by trading in the Options market
  • Using sound share market knowledge to invest in equity is the key to building a large corpus for a future financial need, because equity gives high returns in the long run
  • Investing in the equity of reputable companies has the added benefit of dividends. Dividendsare payments that shareholders receive from the company’s earnings. While giving them out is not compulsory, established businesses do pay dividends to increase their shareholder base.

Equity for a Shareholder

Apart from knowing the value of equities in which one has invested, it is also important to know the value of personal share of equity, which may be calculated by subtracting total liabilities owed from total assets owned.

Equity = value of assets – value of liabilities

Equity investment returns

Return on equity measures a company’s ability to use its investors’ funds to increase its profit and earnings. It is important to keep track of equity returns to understand if there are long-term benefits from investing in a particular company.

Types of Equity Markets

  • Primary Market:

    Every company that proposes to go public must come out with an initial public offering (IPO). During the IPO, the company offers a certain portion of its equity to the public. After the closing of the IPO, the shares are listed on one of the stock exchanges, which are an important component of the stock market. The primary exchanges in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
  • Secondary Market:

    After the listing of the IPO shares, these are traded on the secondary market. This platform offers the initial investors an option to exit their investments. In addition, investors who failed to procure shares during the IPO can purchase these from the secondary market. Trading in the Indian stock market is commonly done through brokers. The brokers act as intermediaries between the stock exchanges and the investors.

Equity Market Procedures

  • Trading:

    The stock exchanges provide an automated screen-based trading platform that is fully automated and computerized. The platform is an open trade system where buyers and sellers can see all the trades and place their orders to suit their personal requirements.
  • Clearing and Settlement:

    The exchanges clear and settle all the trades that are executed during the trading day. These exchanges operate well-defined settlement cycles without any deviations and/or deferments from the procedures. The trades during the trading session are aggregated and positions are netted off with the objective of determining the liabilities of the trading members. These procedures also ensure movements of the funds and shares are completed in the right manner. The settlement cycle adopted by the exchanges operating in the Indian stock market is T+2. This means that all securities and funds movements are completed two days after Day 1 (which is the day on which the trades are executed). Under the T+2 cycle, buyers receive credits of the shares in their demat account, and sellers receive the sale proceeds in the bank accounts that are linked to the trading account within two days.
  • Risk Management:

    A widely known stock market basic is that investing in the equity market has several risks. The stock exchanges have developed a comprehensive system for risk management. This system ensures the investors’ interests and prevents fraudulent activities by the companies. The stock exchanges constantly upgrade the risk management system to pre-empt market failures and stay abreast of the changing mechanisms. Some components of the risk management system include margin requirements, pay-ins, and voluntary close-out facilities, and liquid assets.

Equity market investing can help investors meet their future financial requirements by beating the rising prices due to inflationary pressures. Understanding the stock market basics and learning more about the market and its regulation, and following a disciplined approach to share market investment can provide huge returns in the long run.