Saturday, October 14, 2006

Equity Investment Basics

When you buy a share of a company you become a shareholder in that company. Shares are also known as Equities. Equities have the potential to increase in value over time. It also provides your portfolio with the growth necessary to reach your long term investment goals. Research studies have proved that the equities have  outperformed  most other forms of  investments in the long term

This may  be illustrated with the help of following examples: 
a)  Over a 15 year period between  1990 to 2005, Nifty has given an annualised return of 17%.
 
b)  Mr. Raj invests in Nifty on January 1, 2000 (index value 1592.90).The Nifty value as of end December 2005 was 2836.55.  Holding this investment over this period Jan 2000 to Dec 2005 he gets a return of 78.07%.  Investment in shares of ONGC Ltd for the same period gave a return of 465.86%, SBI 301.17% and Reliance 281.42%

Therefore, Equities are considered the most challenging and the rewarding, when compared to other investment options. Research studies have proved that investments in some shares with a longer tenure of investment have yielded far superior returns than any other investment.
 
However, this does not mean all equity investments would guarantee similar high returns. Equities are high risk investments. One needs to study them carefully before investing. 

Broadly there are two factors: (1) stock specific and (2) market specific. The stock-specific factor is related to people's expectations about the company, its future earnings capacity, financial health and management, level of technology and marketing skills.  The market specific factor is influenced by the investor's sentiment towards the stock market as a whole. This factor depends on the environment rather than the performance of any particular company.

In the investment world we come across terms such as Growth stocks, Value stocks etc. Companies whose potential for growth in sales and earnings are excellent, are growing faster than other companies in the market or other stocks in the same industry are called the Growth Stocks. These companies usually pay little or no dividends and instead prefer to reinvest their profits in their business for further expansions.   While looking for "Value Stocks" the task is to look for stocks that have been overlooked by other investors and which may have a 'hidden value'.

To download the entire material for financial markets visit NSE, India
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