Equity Shares Investment can be defined as investment by companies (or individuals) in equity or shares of other companies.
To invest in equity shares, the investor needs to be an active stock exchange member.
Share prices keep on fluctuating in the share market. Therefore, the returns generated as a result of equity investment are 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 various returns on investment.
During the normal course of the business, there are numerous investment options that a company has about parking their funds in a place where they can expect a certain amount of return against their investment.
Equity Shares Investment is considered one of the primitive choices for businesses and individuals.
This is because the outcome can roughly be predicted and is considered a relatively safer option.
Benefits of Equity Shares Investment
Equity Shares Investment holds several benefits from the perspective of the investor. These benefits include the following:
- The outcome from equity shares can be easily predicted because a lot of stocks are cyclical, and how they will respond with time can be predicted. Therefore, the company knows the threshold of profit or loss that is likely to be achieved over time.
- In the same manner, equity investments are also safe because the Stock Exchange acts as an intermediary on behalf of both parties. Hence, the chance of fraud, or money being completely lost due to the scam is minimal.
- Market data is readily available for all publicly listed companies. This implies that there are no informational asymmetries that the company needs to worry about. This information can be very resourceful when deciding which company to invest in.
- Equity Shares investment propagates diversity. This means that the company can choose the risk profile more suited for them. If they want to go for a high-risk high-return profile, they can choose riskier stocks based on the available market data.
- It can generate abnormal returns, in a few cases. Since equity shares investment does not ‘guarantee’ returns, profits on either end of the spectrum are possible. This implies 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. If the company does not do well, the shareholders cannot be asked to liquidate their assets to pay the dues for the company. Therefore, investors are safe and secure regardless of how the company performs.
Disadvantages of Equity Shares Investment
Even though equity shares investment is a top-notch priority for many investors, there are certain drawbacks associated with equity shares investment that need to be incorporated. These disadvantages are as follows:
- Equity Shares Investment is risky because it does not guarantee results. More often than not, the resulting share prices are a factor of multiple factors, including the company’s performance and other macroeconomic factors.
- Even though investment can be liquidated at any point in time, if investors choose to liquidate their resources, and the share prices are low at a given point, 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, long-term investment options, might not be viable.
- There is no guarantee of returns (or dividends). Even though equity shares are supposed to receive dividends. Hence, dividend payout is not guaranteed if the company does not generate profits.
- 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, that the common shareholders might not even recover their investment because they are the last ones to receive residual payoffs. Even though this is a very rare case, this probability cannot be ruled out altogether.