DEMOCRATIZING WEALTH CREATION
Module : 1 Chapter : 1
First Step To Equity
Investments
DEMOCRATIZING WEALTH CREATION
Taking baby steps to
Equity Investments
Why equity?
Equity investment is the money that is invested in a company by purchasing shares of that company in the stock market. These
shares are typically traded on a stock exchange. Equity refers to the shares in a company’s ownership. In simpler terms, it is the
total amount of money that a shareholder is eligible to receive after all the company’s debts are paid off and its assets liquidat-
ed. When an individual invests in a company’s equities, he/she becomes a partial owner of the company.
Why should one invest in equity markets?
Let us have a look at why every individual should think of investing in the equity markets.
1) Earn higher returns: Investors can earn through capital appreciation as well as dividend income. Investing in shares
of companies with fundamentally strong financials can help you earn a regular dividend income as well as capital appre-
ciation. Equities also have high return generating potential, given the higher risk to give you high capital appreciation
in the long term. For example, Sensex has offered CAGR of 15.71 per cent, 11 per cent, and 10.96 per cent in the past
5, 10 and 15 years, respectively, which is much higher when compared to the Provident Fund interest rates. The highest
returns among government-backed debt savings schemes have remained between 8.25 per cent-9.5 per cent p.a. in the
last 15 years.
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DEMOCRATIZING WEALTH CREATION
2) Beat inflation and maximise wealth creation: Inflation is one of the main constraints in wealth creation for inves-
tors in the long term. Lower returns than the inflation rate will lead to wealth erosion. For example, banks are currently
offering an interest of around 5.5 per cent p.a. on FDs for a period of 3 to 5 years. If you fall in the highest tax bracket,
your net return (post-tax) will be around 3.85 per cent per annum. It means that if the inflation during the investment
period is 4 per cent, then instead of wealth creation, it will lead to wealth erosion by 0.15 per cent each year. You do not
want this to happen, right? Investing in equities can allow you to earn a high return that can beat inflation by a great
margin and help you to maximize wealth creation in the long term period. Looking at the past performance, stock indi-
ces have overwhelmingly outperformed return on debt and most other investments in the long term.
3) Get attractive tax advantage over other asset classes: Investing in equities also offers tax benefits that are better than
many asset classes. Long-term capital gains (LTCG) up to Rs 1 lakh from equity investments are exempted from tax,
whereas LTCG above Rs 1 lakh is taxed at a rate of 10 per cent. Short-term capital gains (STCG) from equity invest-
ments are taxed at a flat rate of 15 per cent. Returns on debt or gold investments attract higher tax than equities. If you
are looking for an investment that is more tax-efficient than gold, debt, etc., you should explore investment opportuni-
ties in the equity segment.
4) Higher liquidity: Equity markets are considered to have one of the highest liquidity among all the asset classes. Investment
in gold, real estate and FDs cannot be readily converted into cash, which is not the case in equity investment. All you require
is to sell your stock through your online trading account and the money will be credited to your bank account within a couple
of days. Apart from this, banks allow loans up to 50 per cent of the eligible shares/equity mutual funds’ value for investors in
need of money but who do not want to liquidate their holdings.
DSIJ Pvt. Ltd. : Office no 211, Vascon Platinum Square, Next to Hyatt Regency, Vimannagar, Pune- 411014 I
Registered Office Address: 419-A, 4th Floor, Arun Chambers, Tardeo, Next to AC Market, Mumbai - 400034
SEBI Research Analyst - INH000006396 Website : [Link]
DEMOCRATIZING WEALTH CREATION
How to get started?
An investor should follow these five simple steps for getting started in equity investment. Let us have a look at each step:
1. Decide how you want to invest in the stock market: An investor can choose to invest in stocks on their own, which
requires regular tracking and reading all the news related to the economy and stocks. Investor can also opt for an expert
to manage their portfolios, which requires them to pay the fees of the portfolio manager.
2. Choose an investing account: To invest in stocks, one has to open an investment account with any of the brokers. You
need to evaluate brokers based on factors such as costs (trading commissions, account fees), investment selection (look
for a good selection of commission-free ETFs if you favour funds) and investor research and tools.
3. Set a budget for the stock market: An investor needs to plan the amount that he needs to keep aside for investing in
equities. This can be done thoroughly with the help of financial planning, which will aid an investor in the roadmap for
his future planning. Investors do need to remember that equity markets are subject to market risks and can be highly
volatile at times.
4. Focus on investing for the long term: Stock market investments have proven to be one of the best ways to grow long-
term wealth. Over several decades, the average stock market return is about 10 per cent per annum. However, remem-
ber that it is just an average across the entire market; some years it will be higher, other years it will be lower, while
individual stocks would vary in their returns. However, for long-term investors, the stock market is a good investment,
no matter what happens on a day-to-day or year-on-year basis. After all, it is the long-term investment returns that they
are looking at!
5. Learn the difference between investing in stocks and funds: Stock investing does not have to be complicated. For most
people, stock market investing means choosing among these two types of investments:
n a) Stock mutual fund or exchange-traded funds: Mutual funds let you purchase small pieces of many different
stocks in a single transaction. Index funds and ETFs are a kind of mutual fund that tracks an index; for example,
Nifty 50 fund replicates that index by buying the stocks of the companies that constitute the index. When you
invest in a fund, you also own small pieces of each of those companies. You can put several funds together to build
a diversified portfolio. Note that stock mutual funds are also called as equity mutual funds.
n b) Individual stocks: If you are after a specific company, you can buy a single share or a few shares as a way to dip
your toe into the stock-trading waters. Building a diversified portfolio out of many individual stocks is possible,
but it takes a significant investment to lay the foundation.
Confidence & faith in equity class:
Equities are more suitable for investors who are willing to
take risk with their investments. Those who are constrained
by the limitations in time or experience in the money market
can also consider equity mutual fund investments for mod-
erate to high returns. Market experts do not profess to know
the economy’s future nor do they claim to have the wisdom
to time markets; what they do know is that, over a period of
several decades, equities always win. Purchasing long-term
investment asset requires trust. Doing so involves handing
over a valuable possession, which is, money, but with no
guarantee that the sum will be returned in full as expressed
in real terms, except for certain inflation-protected securities.
Investing is an act of faith. Over a period of many decades,
the average market returns from the stock market have been
around 10 per cent per annum.
DSIJ Pvt. Ltd. : Office no 211, Vascon Platinum Square, Next to Hyatt Regency, Vimannagar, Pune- 411014 I
Registered Office Address: 419-A, 4th Floor, Arun Chambers, Tardeo, Next to AC Market, Mumbai - 400034
SEBI Research Analyst - INH000006396 Website : [Link]
DEMOCRATIZING WEALTH CREATION
n Do thorough research before making any investment as this is considered the key to anyone’s success in the mar-
ket. It is also important to know what is happening around. Don’t let the trading fees be more than 2 per cent. For
any clarification, do talk to your broker.
n Do make an investment, even if it is small. With this, one can take good advantage of compounding from an early
stage. Don’t take any emotional investment decisions and make sure to do research when you are selling or buying
any stock.
n Always diversify. Make your investments in those sectors that are not correlated. Investing in more than 3-4 sectors
ensures low risk to your portfolio. Do not over invest and always set a budget.
n Buy shares when available at low prices. Do your own research first even when the news is from a credible source.
Don’t listen and implement all that you get to hear.
n Do create your core holdings as these can act as pillars of your portfolio. Make sure such investments are made in
companies having low risk. Don’t get greedy; it is important to know your winning and losing stocks. Taking an
unexpected loss can be hard at times, but make sure that you do not keep losing money due to greed.
n Always know the risk you can afford to take. It is wise to invest your funds in those companies that have low risk.
If you can take risks, invest in high-risk companies as they fetch good returns. Don’t expect to always buy low and
sell high as it does not always work.
DSIJ Pvt. Ltd. : Office no 211, Vascon Platinum Square, Next to Hyatt Regency, Vimannagar, Pune- 411014 I
Registered Office Address: 419-A, 4th Floor, Arun Chambers, Tardeo, Next to AC Market, Mumbai - 400034
SEBI Research Analyst - INH000006396 Website : [Link]