Equity investment is one of the most profitable ways to invest your money. It is both beneficial as an asset for the present and yields future dividends for you as an investor. Many, however, are still confused about the question, what is an equity investment. If you fall into such a category, you are in the right place and would be equipped with everything you need to know in this article.
An overall view on equity investment
Equity investment is a sum invested in a company by you purchasing shares of that company in the stock market. As an investor, a certain portion of that company would be allocated to you, in exchange for a certain amount. This amount varies depending on the value of the company and the price of its stock. Normally, you are allowed to purchase as much available stock as you can afford.
Why should I consider equity investment?
When you purchase equity, you have a share of the company, and receive capital dividends. For as long as you keep your share, you would enjoy the profit gains of the company, if it pays dividends. Some of the reasons why you should consider equity investment are:
- You would enjoy the benefit of capital gains and dividends
- Over time, equity would appreciate in value and you can sell it for a profit
- If the company’s assets are liquidated and other obligations are met, you would receive an amount for your equity share.
- It diversifies your portfolio as an investor
Where can I invest in equity?
They typically sell equity shares on the stock market. Because of digitization, there are now mobile applications that allow you to access and trade on the market. However, stockbrokers still remain and you can invest in shares through them.
What are the risks associated with equity investment?
Although there are many benefits to investing in equity, like all types of investments, there are also risks. Stocks are prone to sudden rise or fall in value, which could cause you as an investor to lose your money. The risks associated with equity investment are:
Credit risk:
This happens when the company you invested in, becomes unable to pay its debts. There are numerous potential outcomes to this situation, like selling more of its shares or its whole share. The company could also resort to borrowing or fold up. These uncertainties could see you lose your investment drop in value or lost completely.
Foreign currency risk:
We value most companies based on international currencies like the dollar. Shifts and variation in these international currencies could see the value of a company fall, and you as an investor consequently experience a drop in the value of equity purchased.
Liquidity risk:
Liquidity risk is the tendency that a company could become incapable of meeting its short term debt obligations. This takes a toll on its value and affects your equity as an investor.
Political risk:
Political instability certainly affects the economic balance of a country. Purchasing the equity of a company in such a country could see your equity lose value.
Economic concentration risk:
The value of a company could drop when they streamline their profit to only one commodity. This happens when there is a sudden fall in the demand for that commodity. A drop in value leads to a consequent drop in the value of your equity as an investor.
- Inflation risk:
Inflation is a major threat to companies lagging. Its value could drop because the ever-increasing inflation affects equity, especially if it does not make plans to compensate. Once again, this would surely affect your equity as an investor and cause it to lose value.
Conclusion
Despite the associated risks, equity investment remains one of the best ways to diversify your portfolio and make a profit. In the reality of things, there is always a risk together with investments, which is why you should do a diligent market assessment. All things being equal, equity investment is an excellent way to create passive income for you.