Adequate finances are the gold in the silver years. Sound financial planning plays a big role in achieving this. For some people, the array of investment options can seem slightly overwhelming. In this article, we take you through equity shares, one of the most lucrative investing options available. And, one of the least understood by new investors. Due to the high returns, equity shares have emerged as a very popular investing option. The shares can be traded for both speculative and regular return. Read on to know how to maximise gains with minimum risk!
Q. What are equity shares?
A. Equity shares represent fractional or part ownership in a business venture/company in which a shareholder undertakes the maximum entrepreneurial risk associated with the company. The shareholders have voting rights.
Earning from the shares: Of all the financial instruments, equity shares offer the maximum return. Investors can earn from equity shares in the following three ways:
Dividend – The dividend is the profit after interest and tax of the company. Every year the amount of profits to be distributed as dividend is decided by the Board of Directors. In some years, shareholders may receive high dividend. The dividend received depends on the holding. Usually companies with good financial health give high dividends.
Interim dividend – This dividend is given in addition to the regular dividend in financially strong years.
Bonus shares – A bonus share is a free share given to current shareholders in a company. The bonus shares received are determined on the basis of the number of shares presently held.
Before investing, it is crucial to look for a financially sound company. Reading up on the following information can help:
- Past annual performance reports
- News about the company’s in its business sector
- Market position of the company
- Reputation of the company/any legal cases against it
Trading and investing through brokers
Brokers or agents, provide investing tips on the basis of your personal requirements. They are a big help for novice investors. They also help to develop a long-term financial plan. The brokerage companies charge a fee for their services. Before choosing a broker, it is a good idea to do a background check. Seeking reviews about the broker and the company, from people around you would also help in your decision.
Risks associated with equity shares
As a rule of thumb, higher returns involve higher risks. Since equity shares offer high returns, they do come with greater risks. The following are some risks are associated with equity shares:
- Risk of a swing in commodity prices which in turn affect the business.
- Adverse reports in the media may affect a company’s reputation, thus affecting its share price.
- Sometimes, frauds and scams affect the value of the shares, sending them crashingovernight and causing losses to investors.
- An adverse government policy may also impact the activities of a corporation and in turn, affect Investment returns.
- The dividend received is not fixed. It changes annually.
Who should consider equity shares ?
Equity shares, even though risky, are a good source of income. People who have about 15-20 years before retirement can opt for a greater number of equity shares in their investment basket. They can also earn through trading in the share market.
People on the brink of retirement or those who are already retired, may need greater security. They should not make major investment in equity shares. To be on the safer side, along with shares, you can invest in low-risk options like debentures and saving schemes.
Automobile, cement are some industries which offer assured returns. There is no limit to the returns one can earn from the equity shares.