Equity investments refer to the money companies raise by issuing and selling their equity shares on a stock exchange. The corporations generally trade these financial securities by launching initial public offerings (IPOs) in the market. The objective of these corporate enterprises is to invite numerous small investors to subscribe to and buy the securities at listing prices. It enables them to raise enough capital to strengthen the current cash flow position and finance various business expansion schemes. The investors might also show interest in acquiring the shares to diversify their investment portfolio and accumulate their wealth. They even earn annual dividends and get a stake in the companies’ ownership.
Kavan Choksi – Why do small investors buy equity shares?
Kavan Choksi is a businessman with a keen interest in modern cutting-edge technologies, business finance, and photography. According to him, small investors are eager to buy equity shares of lucrative companies for the following primary reasons:
- Income generation
Investors purchase equity shares for a regular source of income that the financial securities generate. The income helps them meet their personal expenses and save money for unforeseeable financial emergencies. The companies distribute a portion of the profits to them in the form of dividends after clearing their tax and debt liabilities.
- Capital appreciation
Many investors notice that the value of shareholdings tends to rise or fall in accordance with share market volatility. These investors normally sell the shares they own when there is capital appreciation in the market value of the financial securities. It enables them to earn capital gains arising from price differences on sales and acquisition of the shares.
Small investors need to remember investing in equity shares of highly profitable companies is never an easy decision to take. They obviously want to buy the shares to generate income and accumulate their wealth through capital appreciation. However, the investors should seriously contemplate the pros and cons of the equity investment scheme before making up their minds. Above all, they need to assess and consider the following factors before actually buying the companies’ equity shares:
- Type of business activities that corporations conduct in the market to generate revenue,
- Corporate enterprises’ revenue-generating potential, financial stability, and market performance,
- Price-to-earnings ratio that evaluates the price the companies’ shares relative to its earnings,
- Beta co-efficient measuring price movements in the companies’ shares due to market volatility,
- The dividend payout ratio shows how much of the companies’ after-tax profits go to the investors,
- Lock-in time duration of equity investment scheme and its potential risks,
- The liquidity of the equity investment scheme indicates the time it takes to convert shares into cash, and
- They have to incur expenses in the form of brokerage, redemption charges, and taxation.
According to Kavan Choksi, buying equity shares gives small investors an opportunity to build up their wealth and avail an income source. However, they should always assess the financial viability and profitability of the companies whose share they are acquiring. They determine the share investments’ P/E ratio, dividend payout ratio, liquidity, lock-in duration, beta co-efficient, and hidden costs. If the investors do have any doubt, they should consult a reliable financial specialist to help them.