Equity Shares Investment – Advantages and Disadvantages

Definition

Equity Shares Investment can be defined as investment by companies (or individuals) in equity or shares of other companies. In order to invest in equity shares, the investor needs to be an active member of the stock exchange.

Share prices keep on fluctuating in the share market, and therefore, the returns that are generated as a result of equity investment is mainly through the spread between the purchase price, and the selling price of the particular stock.

Other than that, equity shares investments also generate results through dividends and other various returns on investment.

During the normal course of the business, there are numerous different investment options that a company has pertaining to parking their funds in a place where they can expect to get a certain amount of return against their investment.

Equity Shares Investment is considered to be one of the primitive choices for businesses and individuals. This is because the outcome can roughly be predicted, and it is considered to be a relatively safer option.

Benefits of Equity Shares Investment

Equity Shares Investment holds a number of benefits from the perspective of the investor. These benefits include the following:

  • The outcome from equity shares can be easily predicted because of the fact that a lot of stocks are cyclical, and can be predicted as to how they will respond with time. Therefore, the company knows the threshold of profit or loss that is likely to be achieved over the course of time.
  • In the same manner, equity investments are also safe in the sense that the Stock Exchange acts as an intermediary on behalf of both the parties. Hence, the chance of fraud, or money being completely lost as a result of the scam are minimal.
  • Market data is readily available for all public listed companies. This implies that there are no informational asymmetries that the company needs to worry about. As a matter of fact, this information can be very resourceful when making decisions regarding which particular company to invest in.
  • Equity Shares investment propagates diversity. This means that the company has an option to choose the risk profile that is more suited for them. If they want to go for a high-risk high-return profile, they can choose riskier stocks based on the market data that is available.
  • It can generate abnormal returns, in a few cases. Given the fact that equity shares investment does not ‘guarantee’ returns, profits on either end of the spectrum are possible. This has the implication that the investor can generate improbable returns, based on dynamic changes in the macroeconomic environment, or within the company itself.  
  • Equity Shares Investment is considered to be a limited liability investment. In the case where company does not do well, the shareholders cannot be asked to liquidate their own assets to pay the dues for the company. Therefore, investors are safe and secure regardless of how the company performs.
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Disadvantages of Equity Shares Investment

Regardless of the fact that equity shares investment are a top notch priority for a lot of investors, yet there are certain drawbacks associated with equity shares investment that need to be incorporated. These disadvantages are as follows:

  • Equity Shares Investment is considered to be risky because it does not guarantee results. More often than not, the resulting share prices are a factor of multiple things, including the performance of the company, as well as other macroeconomic factors.
  • Even though investment can be liquidated at any point in time, yet if investors choose to liquidate their resources, and the share prices are low at a given point in time, the investors might end up losing money.
  • There is an element of uncertainty that is involved with equity shares investment. There is never a guaranteed way to determine the optimal time of selling a particular stock. Therefore, for long-term investment options, it might not be viable.
  • There is no guarantee of returns (or dividends). Regardless of the fact that equity shares are supposed to receive dividends. Hence, if the company does not generate profits, dividend payout is not guaranteed.
  • Residual claims for equity shareholders (especially when it comes to common shareholders), tend to be problematic for a lot of shareholders. In this regard, it can be seen in the case of liquidation, the common shareholders might not even get their investment recovered because they are the last ones to receive residual payoffs. Despite the fact that this is a very rare case, yet this probability cannot be ruled out altogether.
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