Equity is a one financial instrument by which company invite the public to invest their money in the company and investor can become a partner of the company. Generally, when the company have insufficient money to expand its business it comes with IPO i.e. Initial Public Offering.
- Equity represents the value that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company’s debts were paid off.
- We can also think of equity as a degree of residual ownership in a firm or asset after subtracting all debts associated with that asset.
- Equity represents the shareholders’ stake in the company, identified on a company’s balance sheet.
Shareholder Equity Formula
The following formula and calculation can be used to determine the equity of a firm, which is derived from the accounting equation,
Shareholders’ Equity = Total Assets − Total Liabilities
Equity can overcome inflation in long run provided invested properly. Since inception i.e. 31st March, 1979, BSE Sensex was 100 points and on 31st March, 2021 i.e. after 41 years BSE Sensex was 47,807 points. Sensex has given approximately 16.24% CAGR. (Compounded Annualised Gross Return)
Principles for investing into equity market.
Sell the looser and let the winner ride.
Don’t let the looser be in your portfolio. There is no guarantee that a stock will bounce back after a protracted decline. While it’s important not to underestimate good stocks, it’s equally important to be realistic about investments that are performing badly. Don’t be afraid to swallow your pride and move on before your losses become even greater.
Don’t chase the hot tip.
Do your own research and analysis of any company before you even consider investing your hard earned money? Tips will never make you an informed investor, which is what you need to be successful in the long run.
Don’t sweat the small stuff.
Do not panic when your investments experience short-term movements. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility.
Do not over emphasize the P/E. Ratio.
Investors often place too much importance on the Price Earning Ratio (P/E ratio). Simply using P/E Ratio to make buy or sell decisions is dangerous and not advisable. A low P/E ratio doesn’t necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.
Do not pick the penny stocks.
A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy Rs.5/- stock or Rs.100/- stock if it becomes Rs.0/- you’d still have a 100% loss of your initial investment. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.
Pick a strategy and stick with it.
Once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors should avoid.
Focus on the future.
The tough part about investing is that we are trying to make informed decisions based on things that are yet to happen. It’s important to keep in mind that even though we use past data as an indication of things to come, it’s what happens in the future that matters most.
Be invested for long term.
Keep a long term investment horizon and just try to avoid large short-term profits. It can often entice those who are new to the market. Long term investment will built wealth and short term investors will only land up with profits.
Be open-minded when selecting companies.
Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps over the decades. This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains.
Taxes are important but not that important.
Putting taxes above all else is a dangerous strategy, as it can often cause investors to make poor, misguided decisions. Yes, tax implications are important, but they are a secondary concern. The primary goals in investing are to grow and secure your money. You should always attempt to minimize the amount of tax you pay and maximize your after-tax return, but the situations are rare where you’ll want to put tax considerations above all else when making an investment decision.
While it may be true that in the stock market there is no rule without an exception, there are some principles which are tough to dispute. Keep in mind that this information is quite general, each with different applications depending on the circumstance. There is an exception to every rule, and we can’t over emphasis this point.
