Equity shares are financial securities that companies sell through a stock exchange market to raise capital from numerous small investors. Each of these securities that investors subscribe to represents their interest in the ownership and control of the corporations. They even receive an entitlement to the future after-tax profits that companies earn. The investors are then collectively known as the shareholders of the companies. In case the companies become bankrupt, their shares constitute the sum of money they will receive on the liquidation of assets. The collective fundraising activity of selling equity shares by the companies and investors buying them is known as an equity investment.
Kavan Choksi – Why do investors choose to buy equity shares of companies?
Kavan Choksi is a businessman with an interest in technology, business finance, and photography. According to him, small investors have specific financial goals that encourage them to buy lucrative investment schemes. However, they tend to choose plans that enhance the purchasing power of their investment even after the effects of inflation and taxation. Many of them opt to buy equity shares of profit-generating companies at competitive prices for the following reasons:
- To accumulate their wealth over time through the capital appreciation of their individual shares,
- Become a partial owner and participate in the workings of the companies whose shares they buy,
- Allot funds to a wide range of financial assets in their investment portfolio through diversification,
- Obtain easy access to the money from the sale proceeds of the shares during financial difficulties,
- Avail capital gains that arise from the sale of shareholdings at prices higher than the market value, and
- Earn dividend income on their equity investment.
How does an equity investment work?
Investors who participate in equity investment schemes acquire partial ownership in the companies selling the equity shares. They provide the corporations with capital by buying the equity shares at the prevailing market price in cash. The corporate enterprises can then use the funds to acquire capital assets, pay off existing debts or strengthen their cashflow position. In return, the investors receive dividends from companies’ profits after paying taxes. In some cases, they even get a bonus share when the companies launch buy-back schemes. If companies perform exceptionally well in the market, the investors can expect a capital appreciation in the value of their shareholdings.
The advantages of buying equity shares of lucrative companies for small investors over other investment schemes are as follows:
- Enables them to exercise control over the companies whose equity share they buy,
- Ensures they receive a regular source of yearly income in the forms of dividends, and
- Generates capital gains when they sell their shares at prices higher than the fair market value.
According to Kavan Choksi, small investors can accumulate wealth and earn a regular income by participating in equity investment schemes. However, they should have a good understanding of how the stock exchange markets work. Investors should also scrutinize the financial records of companies they intend to buy to assess their performance. Above all, it is imperative for them to read the fine lines of the prospectus before taking any decision.