Decoding Equity as an Investment Instrument
April 2, 2017 . 261 views
Investing into equity may sound complex and sometimes intimidating considering you have either heard of people making millions or losing millions at one go.
Let me just start by saying there is a lot more to equity investing than that!
What is Equity?
An equity share of a company (or a stock, as it may be known) represents fractional ownership of the company.
So, when you buy an equity share from the stock exchange, you become the shareholder of that company and, in a sense, become a part owner. Now, how much stake you have in that company depends on the value of your investment. This means that now you are with the company for better or for worse, until of course you sell those shares, and not death do us part, since you pass on these shares down the generation.
Risk Vs Return
Investing in equities is definitely riskier than other investments and demands a lot more of your time. However, it has proven to be more rewarding than other asset classes over a longer period.
Investing into equities is probably your best bet against inflation too.
Ways of Investing into Equity: Direct Equity or Equity Mutual Funds
Direct Equity: If you have the understanding and knowledge of which equity shares to buy and sell on your own then you can invest directly into equities through the stock exchange. Your investment represents your ownership into that particular stock, and if you want exposure to more stocks, you have to buy those individually.
Equity Mutual Fund: Mutual funds are a way of investing into equities wherein you buy a unit of a mutual fund, which has an underlying exposure to several stocks in its portfolio. It is nothing but a pool of money collected by an Asset Management Company (AMC) and run by a professional, called the fund manager, who invests into shares of companies based on his expertise and runs a diversified portfolio. The best part is that a fund offers you this diversification for as little as an investment of Rs 500.
Returns from Equity:
There are two types of returns you can generate from equities.
1) Capital Appreciation
In the normal parlance, this is referred to as the gain or profit that you earn on sale of equity shares. So, if the share price is trading at Rs. 100 and you buy 100 shares, you would have invested Rs. 10,000. Now, if the company’s share price goes up to Rs. 125, the value of your investment will be Rs. 12,500, hence netting you a profit of Rs. 2500 (Rs. 12,500 – Rs. 10,000). When you express this in percentage terms, the return in your investment will be 25% (Rs. 2,500 [profit]/Rs. 10,000 [total investment value]*100).
2) Tax Treatment on Capital Appreciation
Long Term Capital Gains Tax = NIL, i.e. if shares are held for more than one year and sold thereafter
Short Term Capital Gains Tax = 15%, i.e. if shares are held and sold within a period of one year
A company’s profit that is distributed to the shareholder is typically known as dividend. It is a reward for a shareholder who holds the shares of any company. They are usually given in proportion to the number of shares owned. This is another form of a gain when you invest into equities.
Tax treatment on dividends
Companies pay a dividend distribution tax of 15% on the dividends. However, you need not pay any tax on the dividend you receive if the total amount from all sources is within Rs. 10 lakhs. Any income by way of dividends above Rs. 10 lakh will be taxed at 10% for individuals.
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