What is Equity Investment?

If you are new to the Stock Market, you may probably ask what Equity means.  You may find the meaning for the word ‘Equity’ as ‘Being Fair’, ‘Equal’, etc in any Dictionary.  Equity is a share of a company you pay for a price either at the Initial Public Offer (IPO) or at the Secondary Market, where the price of the share is determined according to the demand and supply of the shares of that particular Company.  

For example, you start a business along with your two partners.  Each of you invest money, say you invest Rs.1 Lakh, your other partners invest Rs.50000/- each and the total amount invested is Rs.2 Lakhs.  Now, the profit share ratio is 2:1:1.  If the business earns a profit of Rs.30000/- the same shall be shared, Rs.15000/- for you and Rs.7500/- each for other two partners.  Just like that loss is also shared.  If the company winds up, you will get the assets of the company equal to your share.

Now, you may ask why need to buy a share of a company, let me explain, when one person decides to do business, he invests his own money or borrowed money from friends, relatives and banks.  He doesn't give any share of profit to any of whom he borrowed from as it is considered as debt.  He needs to pay it back when they ask for the money.  He enjoys all the profits and also suffers all the losses.

When his business needs to be expanded and he finds short of money, he can borrow from the same people but when they refuse to pay, he offers to share the profit.  An agreement gets signed and formed as Partnership Firm when people accept the offer.  Again when the business to grow more and expand its business to the great extent, it needs more funds.  Since more than 20 persons aren't allowed to form a Partnership Firm, and they have only limited money, the business have an option to go public and offer to share the profits and of course losses among the investors.

Eventually, the shares of the company are listed on the Stock Market with all rules and regulations and the shares are bought and sold by the people at any time through a medium, Brokers.  The price of the share is fundamentally determined by its performance and technically determined by its volume and other factors.  If you buy a share of a company for Rs.20/- and it goes up to Rs.30/-, you get a profit of Rs.10/- if you sell it. 

By buying the equity share, you become the shareholder of the company.  Say, if you buy about 100 shares of Reliance Industries Limited (RIL) at the rate of Rs.100/-, you would pay Rs.10000/- and you become the shareholder of the company, you become one of the owners of the company, to be precise.   When the share price of RIL goes up, say from Rs.100/- to Rs.200/-, your share value of 100 shares become Rs.20000/-.  As on date (31/01/2019), the share price of RIL is Rs.1212/- and the value of your 100 shares is Rs.1,21,200/-, a whopping appreciation of 1112% and you make a profit of Rs.1,11,200/- if you sell it at this price.  Remember you didn’t lose the money by investing in RIL equity.  One can also indirectly buy the shares of any company or combination of companies through Mutual Funds.