For novice investors, foraying into the equity market can be a thrilling yet challenging experience. The stock market is a complex entity for those viewing it from the outside, but once you understand the rules it functions by, there is a real chance of making your money grow. Want to begin investing in equities but don’t know where to start? Read our beginner’s guide to understanding equity investments and let us get some basics out of the way.
What is Equity?
Referring to the shares in a company’s ownership, equity is the total amount of money that you will receive when the company pays off all its debt and liquidates its assets. When you, as an investor, invest in a company’s equity, you become its partial owner. Being an equity shareholder, you have the right to participate in the company’s profits, whose share(s) your own.
Note that when you invest in a company’s equity, you can earn profits when prices appreciate. For matters related to the board of directors, you will enjoy voting rights.
How Can You Invest in Equities?
You can invest in this asset class via two ways: direct investment through stocks and investment via mutual funds.
Direct Investments Through Stocks
If you wish to invest in equities directly through stocks, you need to open a Central Depository System (CDS) account. CDS is an account for investors to buy and sell shares, as well as to track shares’ movements and all CDS accounts are maintained by our very own Bursa Malaysia. Some of the advantages that you can get while investing in equities directly through stocks are:
- High Return Potential
This is perhaps the biggest benefit that you can derive through direct equity investment via stocks. If you can make the right pick, you can make substantial gains. Having said that, success entirely depends on your stock picking skills and the ability to sell it at the most opportune time.
- Huge Investment Universe
When you opt for direct equity investment, you get to choose from a large universe of stocks. You can pick the one which you feel has the potential to deliver maximum growth and augment your wealth in the long run.
Things to Keep in Mind While Investing Directly Through Stocks
In direct equity investing, you need to be more careful about risk management. Hence, you must:
- Do thorough research on the different parameters before buying a stock.
- Keep yourself abreast with the latest market developments.
- Give yourself enough time to learn about stock market jargon and other fine details.
- Understand the balance sheets of companies before investing and know their order books.
If you can spare time to do so and understand these things in-depth, you can go ahead and invest in equities directly through stocks. If not, the second option can be more prudent.
Investments Through Mutual Funds
Over the years, mutual funds have emerged as one of the most popular financial instruments to build a corpus for different life goals. Some of the significant advantages that you get while investing in equities through mutual funds are:
- Professional Management
While investing in direct stocks tests your skills. In the case of mutual funds, the fund manager picks up stocks and takes a call on your behalf. The manager does research and keeps track of market movements, and places a bet accordingly. In a nutshell, you can leverage the expertise of the fund manager.
- Diversification to Bring Down Risks
Mutual funds diversify your investments across industries and sectors. This brings down the quantum of risk associated with equity investments. Diversification ensures that the risk is well spread out. Note that events affect different industries differently. Optimum diversification is important for long-term success.
- Low-ticket Size
The ticket size of mutual fund investment is relatively small. In other words, you can start investing from a pretty low amount. You can gradually top up your investment with an increase in income. This will aid you in building a large reservoir of funds.
- High Liquidity
Mutual funds are highly liquid. You can easily convert the same into cash when you require money. Upon placing a redemption request, the money is credited to your account the next day, subject to exit loads, if any.
Things to Keep in Mind While Investing Directly Through Mutual Funds
Just like direct equity investment through stocks, there are certain things that you must keep in mind while investing through mutual funds. Some essential lookouts are:
- Long-term Fund Performance
While investing in an equity mutual fund, it’s vital to consider the fund’s long-term performance. See how consistent it has been while delivering returns and how well it has performed during the bearish phase. It’s prudent to opt for a fund with consistent returns and has contained losses well when markets weren’t at their best.
- Fund Fundamentals
Prior to investing in a mutual fund, it’s crucial to look at the fund fundamentals. Identify its investment composition and the entities it invests in. Also, see how long the fund manager has been managing the fund. The performance of mutual funds depends to a great extent on the calls taken by the fund manager. It’s advisable to opt for a fundamentally strong fund whose manager has been there for a long time.
- Expense Ratio
Expense ratio, expressed in percentage, is the amount that fund houses charge from investors to address various fund management costs. The expense ratio is low for direct plans compared to regular ones. You must remember that a high ratio can eat into the profits.
If you have an aggressive outlook and a high-risk tolerance, equities are the go-to asset class. They can help you build adequate funds for different life goals, especially long-term ones, and ensure you address them with ease. By following basic rules of investment and educating yourself about the equity market, you are giving yourself a higher chance of success towards growing your wealth.