Investing In Equity- A Long Term Gain
An equity share, which may also be referred to as a ‘share’ represents the form of fractional or part ownership or possession in which a holder of such share, being a fractional owner, willingly exposes himself to the maximum entrepreneurial risk associated with carrying on a business or venture. The shareholders of such shares are members of the company and possess voting rights in the company. Investing in such equity shares can be very profitable for an investor who is looking to take up the risk associated with equity shares. There are various advantages of investing in equity shares. The main advantages are listed below:
- Profit Potential:
The potential for earning profit is greater in equity shares than in any other type of investment in securities. In some shares, the current dividend yield may be low but the potential of making capital gains is very high in equity. The total yield or yields to maturity may be substantial over a long period of time. To diversify their portfolio, one may invest in unconventional types of equity like Private Equity as well.
2. Liability Is Limited:
In a corporate organization, the owners generally have their liability limited by shares of the company. Equity Shares are usually fully paid up. Shareholders risk losing their investment, but nothing more than that. They are not liable for any failure on the part of the organization to meet its obligations.
3. Hedge against Inflation:
An equity share is an effective hedge against inflation, though it does not fully cover the investor against any decline in purchasing power as it is subject to the money-rate risk. But in situations when interest rates are high in the market, shares tend to be less attractive to investors and prices tend to be depressed.
The owner of equity shares has the right to freely transfer his shares to someone else in the market. However, the buyer must ensure that the issuing organization transfers the ownership of the share in its books so that privileges like dividends and voting rights accrue to the new owner of such shares.
Although the individual has the right to sell his shares, there may be little or no trading in the shares of some corporations due to the lack of demand for such shares by any interested buyers. Owing to this reason, equity shares of many small organizations are less liquid and difficult to market. There are various other less marketable investments available like a Real Estate Fund. India has a diverse securities market and an investor has the opportunity to make profits by investing in less marketable securities as well.
5. Growth Prospects:
The main advantage of investing in equity shares is the ability of these shares to increase in value by taking part in the growth of the company and its profits in the long run.
6. Tax Benefits:
In addition to long term profits, equity shares also offer tax benefits to the investors. The capital profits on equity shares are a result of an increase in principal value or capital gain of a share, which are taxed at a lower rate than other heads of income in most of the countries.
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