What is equity ? Understand its right meaning to reap the benefit

What is equity ? This question is running in every Indian investor’s mind. Why? because equities have done very well in past 10, 20, 30 years but investors are not able to make money. What is equity – a share, market,  a fund or an asset class? Yes in this article we will discuss everything related to equity that will help you in creating wealth.  Few months back we wrote this article in Hindi and we were flooded with mails & messages that we share this article in English. So read it to understand the right meaning of equity & reap the benefit.

If as a Financial Advisor we ask you to invest in Equities or Equity oriented Mutual fund, the typical reaction is – We don’t want risk in our investment but we want decent returns too. In some previous topic, we have discussed that importance of high rate of return and its impact over long run. Even though equities share have given the wonderful returns over long run not only in India but world over, Indians are not really comfortable investing their money in equities. Less than 6% of their investments are into this asset class whether directly or indirectly.

Just to give you comparison how equities have delivered returns over last 30 year, look at the graph below. The graph shows you how Rs. 100 invested in different asset class fared over last 30 years ending March 31st 2010.

What is Equity? Lets understand, what exactly Equity is all about

Equity is nothing but ownership; ownership in Business. For Ex. if you hold 10 shares of  XYZ Company out of total 1000 shares floated by the company – you are 1% owner in XYZ’s business. So if XYZ will make profit you will get your share from dividends and price appreciation but if company makes losses your capital will go down(that will be reflected in stock price). A general question – If we ask you to start your own new business, how much time do you think you would like to give before you start thinking whether its really worth it or not- 1 Week, 1 month, 1 year. You  must be thinking that we are joking. Ideally we should think for some long time when we enter in any legitimate business. But this common principle we don’t really apply when we invest in other’s business which can be done through shares/equities.

When we buy equities, we start looking at the price next day or next week. For many who call themselves investors, long run is 1 month. But do you think the management of the business of which we buy shares really looks at their business growth in such a short period.

In equities, the rule of Farming applies

This basic rules states that:-

1. You first have to sow a seed.

2. Keep watering it for it to grow.

3. Wait for some time with patience.

4. With passage of time, you will get fruits of your hard work and patience.

But when it comes to equities, we think that HAATHON MEIN HI SARSO UGTI HAI. We want good return in short time. How many of us really think of equities for long horizon.?We keep gold for generations. Grandparents go for bank fixed deposits for their grand children, but no one invests in share of banks, say HDFC Bank for their kid’s marriage. And, no one plans to invest in equity mutual fund for their retirement.

Fundamental Investing & Speculation

Equity give you two kind of return, one is speculative and another is fundamental growth. 95% of the investors in shares are here for speculative gain, that is gain  from the short term price movement of shares. They start TIMING THE MARKET rather giving TIME IN THE MARKET. This approach for short term gains is the real cause of loss. Investment for long run is not only rewarding but also beats inflation by a good margin and creates wealth. Now think of Indian business or Indian economy for next month, you will be clueless but think of it for next 5 years, 10 years. We know that you are aware of the answer.

Risk Involvement

Now people call equity risky. Unfortunately risk is not understood by many investors. In short run, risk is in volatility of price of underlying asset i.e., how much it can rise and fall given a period of time. But in long run risk is not volatility but the risk is to maintain the purchasing power of your money. Look at the price of petrol in last 30 years(in chart 1) and then compare it with your return in FDs, gold, Endowment or Money back Plans.

Equity Investment

A picture that explains equity as a long term asset. I have blurred this image because dates are meaningless in a long history but just to share first part is IT bubble of 2000. Market went down by 55% (that’s too much) but if you look the second part – the tech meltdown also looks normal. Focus on long term.

Equity Long Term

 

Why people don’t make money in Equities?

looking at the graph above, it must be clear that equities do give returns. But the question still remains unanswered that if Equity gives returns, Why people don’t make money out of equities. The answer lies in their EMOTIONS. The two basic emotions Greed & Fear will make you feel comfortable when the markets are going up and feel disheartened when the market goes down, even though one really don’t need to sell at that time. Always remember that equities is a long term investment and after you invest if emotions are making you restless, think about forgetting this investment. Checking daily profit or loss and anticipating the future growth has no meaning and is futile exercise.

In the end, invest in equities, but as a long term investor and partner the Indian Growth Story.

Print Friendly

69 COMMENTS

  1. sir
    i happen to read the article and it is in simple fluid style and make common man

    understand the word equity. but still i have a doubt as a layman who do not
    have any qualified knowledge or expertise in investments in stocks or mutual
    funds.
    as a commerce graduate and as an experienced banker i have gone through
    the motions of balance sheets and its stakes of different people of the balance
    sheet. ie as financier, sundry debtor, sundry creditor, and as promoter of the
    company. in a particular period of time. and also have gone through the reports
    of the company to its shareholders. and also the reports of the auditors of the
    company. and if we analaize the 2 balance sheets of the company we can have an idea of roi to various stake holders. but i am unable to know how the mutual
    funds and stocks give the return. or declare dividend. and the growth shown
    by your chart is alarming considering the total growth of the industrial sector.
    and please guide me whether the growth shown by you can be realised.
    let us imagine a stage that on redemption of equities of a particular company
    whether we will all get the return shown by you. how is it possible. kindly
    also tell me that the returns given is based on the profit earning capacity of the industry. or manipulation. is stock market is on scientific terms or speculative
    terms.
    kindly brief me about sensex and nifty and their real effect on the industry

    • Hi Srinivasan,

      I must say you are a rare breed who can understand companies reports to check ROI.

      Read this “How mutual Funds work” it may answer few of your questions

      http://www.tflindia.in/2010/05/how-mutual-funds-work.html

      Ya you rightly said charts are alarming & you will be surprised that we have not included dividends in it. It’s a high time people should understand right meaning of equities & should participate in growth of the economy.

      Real important question “whether the growth shown by you can be realised.” I think last para answers this question.

      For rest of your questions read this

      You shall be surprised to know that the combined earnings of Sensex companies in 1992 was 80, in 2000 was 240 & now 860. This EPS growth directly convert into growth of Sensex from 1992 (Sensex was close to 2000) till today EPS has grown 10 times & our Sensex has grown same 10 times. Now Indian businesses are growing and so as the profitability of the companies. In this case, EPS is bound to go up and so as Sensex.

      http://www.tflindia.in/2010/11/sensex-pe-ratio.html

      If you still have some question please feel free to ask.

    • Hi Vardhan

      There is one good thing & one bad thing about your question. Good thing is you want to invest for long term in equity but bad thing is you want to invest directly in equity rather than going through Mutual Fund Route. The biggest problem with direct equity is that a very small number of people can do it right. And people who can do it right don’t ask for suggestions or tips – they just research & make their investments. But most of the people just feel they’re right, till they get really screwed big time when market makes a tern. I am having a big confusion that why people think they can beat mutual fund managers? Direct equity demands too much attention & at times it’s too addictive. And when you can’t control yourself, it can ruin your portfolio and wipe out your savings. But if you still want to test the water try this with small amount.

    • Hi Jyoti

      What I can infer from your question is you are a non earning member & would like to trade in equity and earn some money. If trading was so easy everyone would have been rich, trading is a not a number game it’s a mind game. For retail investor success in trading has a very low probability. Read what Rakesh Jhunjunwala said on this diwali, He begs retail investors not to trade in the equity market, “I think 98% of retail people lose money in trade. Whether correction – no correction, bull phase – bear phase. Everyone has a sad story. I have traded because it’s my 24 hour profession and I am doing it for the last 25 years. Trading goes against basic human nature. You have got to die 1000 deaths and 1000 egos in order to be a good trader. It’s not easy for every human.” Instead, he says, one should invest in mutual funds. My personal suggestion is if you seriously want to contribute to your family’s income join some part-time job or work on any existing hobby that have some potential to generate money.

      • Hell sir .i am teachar and i want invest 2000 pm in equity by mutal fund sip for long term more than 10 year .which fund better for me. I thiknk invest 500 in 4 fund . My one Question is .for example i get 100 units per month by investment in sip after 10 year i have xyz unit . How any one loss its principal amount ? Then we have unit .

      • Hello sir i am new invester in sip or equity .i am teachar and i want invest 2000 pm in equity by mutal fund sip for long term more than 10 year .which fund better for me. I thiknk invest 500 in 4 fund . My one Question is .for example i get 100 units per month by investment in sip after 10 year i have xyz unit . How any one loss its principal amount ? Then we have unit . Plz reply on my email id at

        • Dear Mohsin,

          as per My perception you have to start with 1000 Rs. sip in funds
          one is Hdfc top 200 and another one frainklin bluechip fund
          this fund is performing well and consistent.

          or

          you will go for Hdfc top 200 and franklin PE ratio fund which is balanced category fund.

          Best of luck and keep a safe & regular investment(saving)

          Harshit Soni

      • Hi sir .i am new in mutal fund sip i want to know how we lose amount in equity if we have UNITS if we dont sell .if company in loss how we lose our princ amount ?

  2. Sir i am engineering student and i want to invest in the market but i dont know how to get started so can you please help me out?

    • Hi Visnu,

      It’s a good move that at the time of college you are planning for investment. For you this is a great time to learn about money through small investments & then make some serious investments when you start earning. Best way to invest in equity markets will be through Mutual Funds. For retail investor SIP (Systematic Investment Plan) is the better way to start the Investment because it reduces market volatility & generate higher returns with the magic of Power of Compounding. There are funds which have sound track record like you can choose any one of them to start with.

  3. @Hemant
    I want to invest 24,000 annually to get money after 17 yrs for my daughter’s studies. She will be one year old in January 2011. Should I invest in any Child insurance plan or in a Mutual Fund. Which plan (traditional or ULIP) will deliver me highest and safe return for my daughter’s education?

    • Hi Atul we have always said Insurance should not be purchased of investment purpose. My suggestion is you should buy a term plan for yourself & take sum assured close to 10 times of your present income. You are asking for 2 opposite things highest & safest returns. With high returns there is always a risk of volatility. Actually in equity risk of volatility reduces with time & much better returns can be generated. You should invest 18000 in Equity Diversified Mutual Fund & 6000 in PPF Account. For Mutual Fund you can choose DSP Top 100 Fund & Templeton Growth Fund. If we expect a return of 12% in next 17 years your portfolio value will be close to Rs 12 Lakh but if you invest it at 8% you portfolio value will be 8 Lakh.

  4. hi sir,
    I want to learn technical analysis and value investing concept Pls suggest some good booka and website . I have litlle bit idea about technical analysis. How to select good company & stock? Pls guide me.

    • Hi Jayesh,

      It’s good to learn but what we want to learn is equally important. If you would have asked me about personal finance books – I would have happily shared that & that were of real use to you. Technical analysis creates an illusion that we will catch the tops & bottoms – I am not convinced about this concept. If you are really serious about reading value investing – try Intelligent Investor & Security Analysis by Benjamin graham. In these books data used is of USA but investment concepts remain same across the world. As you have asked how to select good company or stock – not for a second I ever felt that I can beat fund manager so I never tried it. When we have professionals that can manage our money for some small fee – why you want to jump directly in the market. End of the day most important thing is achieving goals or building wealth – rather than how we do it.

      Read this
      http://www.tflindia.in/2010/05/keep-it-simple-while-investing.html

  5. hi sir wat will happen if v r caught in spiral like japan ie correction of 80% & still bleeding though japan s co.s are not bleeding then y the nikkei is not giving the returns.i hope u must be getting wat i wanted to ask..pls do clarify why we will go on making new highs on index although with ups n downs… thnx

    • Hi Amish,

      There are 2 reasons for what happened in Japan
      First when their market topped it’s valuation was almost 5 times of average.(Their PE was approximately 100 at that time) Read below article to understand PE
      http://www.tflindia.in/2010/11/sensex-pe-ratio.html

      Second Japan is now a developed country & in last 2 decades their GDP growth is 2-3% max.

      Hope it answers your concern. Next 10 year will be Golden years for India – you will like to sit out & watch the game or would you like to participate. 😉

  6. Cudos Mr. Hemant,

    I am a Doctor and i am really impressed by the effort and heart you have put down in your website and its articles. I have not found any BETTER, STRICTLY TO THE POINT, FINANCIALLY SOUND and most importantly HONESTTTTTT articles than yours. I heartily appreciate your work.

    As you have mentioned, Honesty is an important quality of a financial planner. i found out a lot of honest and hearty efforts here.

    thanx for making up this site for commoners like us.

    i am a 28 yr old married common man with little or no financial family liabilites. i am working as a lecturer with a monthly income of Rs. 40,000 and my parents are well to do. i’ve not managed my funds except last minute ELSS buying for tax savings. what do you suggest me to read and follow to make extra income and pension. i dont need any insurances, i have enough. i have downloaded yr ebook and will read it.

    thanx for everything

  7. Hi Hemant

    The equity fund comes with 3 option- Growth, Dividend payout and dividend reinvestment.
    Which one is better one and with what implications.
    Thanks
    Sumit

  8. Hi Hemant,

    It has been a pleasure for me reading through the articles at http://www.tflguide.com. Its rightly said by you that investing directly into equities demands greater attention and also some disciplined approach towards it.
    I’m 24 years old, a software engineer by profession, just 2 yrs into job. I have keen interest in equities and try to follow up with market scenario as much as possible. Its quite a daunting task to invest in equities and earn regular returns. I have invested and have faced the music couple of times, though I would like to continue and learn on the job. As rightly said by you, one can invest in Mutual Funds if one has zero knowledge of equities.
    I would like to invest in some good funds – monthly 10,000 for a period of 7-10 yrs which would give me an avg. annualized return of around 20-25%.
    Can you suggest some funds which I can consider, some balanced fund through which I can achieve my goal. I prefer HDFC as a Mutual Fund House over others.

  9. every month i can save upto 5k upto 11months time. can u please suggest me .where i can invest so that i can get my money with minimum back .on 12th month iam planning to take insurance plan with that money ..
    please suggest me as early as possible ….

  10. hi hemant sir,

    presently i am working in siemens as a design engineer, i am very much itreseted in share market in nse, i want to be a sub broker, nse module capital market dealer module i have is it sufficiant for sub broker exam & i want to ask u one more think that a lot of nifty is better or any indiavidual company share. & if i am purchasing any share of company than that time whats thing i need be calculate

  11. sir
    what is mean by equity broking ,what are the content involved in equity broking,and what should we understand from “investers preference towards equity broking”

    • Hi Himanshu,

      You are at a good age to start accumulating for your reitirement. Pension policies have not been able to deliver and some strict IRDA regulations has made them least attractive.Also traditional and ULIPs pros and cons are there to consider. You can think of investing through Mutual Funds which are highly liquid and cost effective instruments to invest for retirement.

  12. Hi. sir I m so glad that i found you. wel i m 25 yr N completed my MBA i am moving myself in share market to work as wel as to know about it. please help me i want to know from begining what is share? And what is share market. i m glad if you will help me.

  13. Hello Hemanth,

    My name is Venkatesh and I am a BE, MBA graduate with experience of more then 5 years in the Business Development hood under the IT sector. Currently I am a freelancer and consulting few companies regarding the business process modelling. I am planning to be a investor and make this as my full time job.

    Please suggest me if inter day trading is more effective or carrying it for more then one day? All I am looking at is making the profit of 10% and in the short run (Max 25 days). If you have any other investment plans please guide me through. Thank you in advance for your time and patience.

    Regards,
    Venkatesh P.S

  14. Hi Hemant!
    I’m reading your articles for a few days and now I’ve subscribed for tfl guide newsletter. You are really doing a great job to helping people like me to understand the market.
    I’m a person with a small monthly income of Rs 13000. I want to invest in Reliance Equity Opportunity Mutual Fund through an SIP of Rs. 500. My time horizon is for 12 years.
    Will it be OK or any other fund you would like to suggest?
    Thanks and regards,
    Ramanuj Singh

  15. hi hemant

    my name is bhanu iam working with a animation studio and earning 12k per mnth. there are no savings done so far…but i want to invest for future plz tell me where to invest.is mutual funds give gud results in4-5 years…

  16. Hello Sir,
    I want to invest in market. I m fresher in this field. So please guide me that how to open DEMAT account (with whome i.e. Religare, SBI, ICICI) and where to invest (Eqity, Commodity etc.).

  17. Dear sir,
    I am a new in mutual fund, i want to know can I open equity mutual fund through online?please give some reliable links by which I can invest in equity for long term.

    • Hi Arnab,

      Yes you can invest in equity mutual fund online either through respective company website or through online intermediaries. Even MF distributors will also give you option for investing online but you will have to go for one time registration which will require some paperwork to do.

  18. Hello Hemant;
    Nicely wrote! But can you answer this question?As you wrote for the long time but at that time many basic things were not present in India like cell phones,infrastructure etc.Again we saw IT share given MINNDBLOWING returns .Now the thing is does our economy really have capacity to grow the rate equivalent to past rate ?There is big problem of government policies also.
    Sencond thing every after 2-3 years there are sign of “Mandi” in a fast growing economy like India what this indicate?

    My third question is in last 5 years only 3 mutual fund(Diversified equity fund) managed to give returns more than FDThen answer me why should an investor look for equity?

    • Hi Mandar,

      I will not go for specific sectors but the answer to your question is that when we are assuming equities will not perform in the long term then we are also assuming that companies will not do business or if they do then they will not be able to grow. That’s probably a difficult scenario.

      Second is the long term investment. If you hear recent stories then there are investors who have held their equity investment, primarly stocks, for 15-20 years and now reaping the benefit of earning high dividends in their post retirement years. They have witnessed so many cycles of ups and down but never liquidated their investment. The primary reason for this is that they invested in companies who have grown from small to big and so their investment. Some of them may not have yielded good result but the performers negated the under-performance of these. Ideally, that should be the long term investment. You have to give enough time to your investment to grow. Yes the cycles of market under performance at different times can vary due to different reasons but we need to consider a long term investment from a long term perspective.

      I hope this answers your queries.

  19. Hi Hemant,

    I have a doubt…

    As you said in the article that if one invests in the equity of a company he owns a portion. Now if that company register profit they’ll distribute the dividend to its shareholder. It means better the company, better will be the profit and so will be the dividend. However as i feel the return which shareholder gets, is mainly due to price appreciation of the company’s share, dividend portion is not too significant. Then why one should invest in a company which will make good profit instead they should invest in a company whose share price appreciation possibility is high. Assuming a situation where lot of people are buying shares of a small company then if company register loss in business then also invester may get good return because of price appreciation.

    I am a layman in this field and it may be clear from my question 😐

    • Hi Swapnil,

      Price appreciation is a major reflection of the company performance. Any company which is distributing its surplus to the shareholders in the form of dividend is considered to be good cause it can happens only when the company is generating good profits. Its only in the initial stages when the company requires higher capital for expansion that they may utilize the surplus for this objective. But if any company is incurring losses for sometime and the price appreciation is still happening then it is not reflecting the true picture of their performance. The company might be in a huge debt then how come it can give you growth? Think of real estate …..it was the same story…company not generating profits…going in huge debt…still share prices were rising….finally they corrected but investors lost….

      I hope this answer your query….

  20. hi
    i started with Rs 2000 sip each in HDFC top 200 and IDFC equity for 24 month . my time period for sip is completed in June 2013 and did not book it to liquefy it.and i want to restart it for a period of 10 years.how can i do it
    secondly,is it possible to invest one lacs rupee onetime in mutual fund equity ,if yes then how.

  21. Dear Hemant

    Thank you for this nice post. I am new to the world of investment and currently going through your “financial literates” modules. I understand from your previous comments that investment in equities require a lot of market research and dedication. Naturally it is very dangerous to invest in the equity markets just on a whim or without proper and diligent research. So i want to ask if it is possible to make our investments through some investment managers or dedicated brokers? And how to go about it? I shall be obliged if you reply in kind.

  22. Sir i have just starting to educate myself in finances and therefore asking u a very basic question

    1▪ In Equity mutual funds do i have to invest a capital just once or monthly for a particular share ?
    2▪ Do i have to specify right in the beginning the period for which i want to hold the share or it is my wish n will to withdraw whatever money has been made yet?
    3▪ what is the smallest amount i can invest?

  23. Hi Hemant,

    Thanks for the TFL. I am a fresher who started job in July 2014. TFL has done good work in spiking my interest in financial matters. As far as I understand equity is a better option for safe and high returns. But what I don’t know is where exactly to start? I am actually troubled by the thought about how do I start investing? Could you please share some thoughts on it?

  24. Sir as an agriculturist I tend to earn an official income of 6 lakhs per annum. Excluding the expenses, what is the maximum amount I can invest in each individuals of PPF, SIP, and Equity funds(ELSS fund, or other funds) each year in order to exempt maximum taxes (I know agricultural income is non taxable)and gain more incomes in the long run say some 15-20 years. Please suggest me the amounts I have to invest in each funds.Thank you in advance.

  25. hello sir; I am a govt employee I want to invest some money in mutual fund.. I have consulted with many others about equity/mutual fund/sip also bt many of their ans are differnt .. I m looking for some best funds whr I invest my money for my better future plss. Suggest me about some of best return fund. I have already opend a sip of rs 500p/m. I wnt invest more for long term. Thank you..!!

  26. Hi Hemant

    It is not only greed and fear, its lack of patience also.

    and you can not keep watering a plant which is not growing. I think you should have some exit strategy also.

  27. Dear Sir,
    I am 44 year old marketing guy. To avoid IT i have invested 1 lakh rupees in Insurance in the last 5 years. After maturity i was surprised that i didnt expect the returns what they have promised. So friends advised me to invest in mutual funds. I am not a finance guy.

    kindly suggest best advise whether to invest in mutual funds/trading.

    Warm regards,
    sampath

  28. Good article to make people understand about equity. What I observed on some of my friends is they don’t know the mutual fund name also. When asked they only answer the AMC name, not the total name of the fund. They bought the fund mostly on the friend’s suggestion that the fund is doing good.

  29. Hello sir,
    I am 25 years old now, i am planning to save 5000 rs per month to get best returns in future, please suggest me which is the best plan??

LEAVE A REPLY

Please enter your comment!
Please enter your name here