Uncertain times such as the Covid-19 pandemic highlight the need for financial security, particularly wealth creation. The two fundamental tenets that we invariably learn vis a vis securing our finances are: first, we should make more money than we spend. Second, what follows is, save as much of the surplus as you can consistently. A significant number of people avoid investing, mainly investing in shares, because they think the financial markets are highly volatile and risky.
To reach any financial goal, it is vital that people actively create wealth by making prudent investments. The risky nature of the stock market makes people wary of investing in stocks. On the flip side, some more dazzling schemes promise quick money to attract many potential investors. Still, these may cause more harm than anticipated.
Wealth Creation Tips with Equities-
Any investment requires thorough research and financial planning on potential investors’ part. Doing so can help reduce and even hamper certain associated market risks. Equity investments have proven to be sound choices, especially for mid to long-term investments. It is so because, despite their short-term volatility, the market has historically always displayed growth.
Read on to find out how to create wealth with equities.
What are equities?
Equities are the shares of a company that you own. As an equity holder, you partially own the shares of the company. Hence, you are entitled to the dividends when the value of shares you own appreciates. But on the flip side, if the value of your equities depreciates, you will also incur the loss.
This indicates the volatility of equity investment. Despite this, you can build an impressive investment portfolio with the right investment tips.
Ways you can acquire equities?
Broadly speaking, capital investments in equities can be made either in publicly traded companies or privately traded ones. Private equity investments thus refer to investments made in companies whose shares are traded privately. Private equity firms are open only to investors who are either accredited or are deemed to have a high net worth. The capital investment in such cases is high as well.
On the other hand, public equity investments are much more accessible to different types of investors. The shares of any company listed as public are traded daily in the market and are highly liquid. When making public equity investments, you can do so directly or indirectly. Direct equity investment is when an investor buys the shares directly from the company during the initial public offering (IPO) or other traders when the shares can be traded publicly post IPO.
Indirect equity investment is when you invest in shares via equity funds, ULIP, ETF, ELSS. Equity funds refer to mutual funds that invest predominantly in stocks. Investment in equity funds can be either a one-off lump sum amount or by SIP. The fund then invests the amount, on your behalf, in multiple shares. The subsequent fluctuations affect the Net Asset Value. Equity Mutual Fund Schemes are a high-risk investment. What balances this risk is that your money is invested by a professional after conducting in-depth research of the market movement.
How to overcome the volatility of equity investment?
It is essential to understand that the market risk and volatility in equity generally refer to short-term investments. In the case of long-term investments, there is always net growth for the daily fluctuations are countered by the overall upward shift of the market.
A classic example is the dip in the market in March 2020 at the onset of the pandemic. Investors who liquidated their equity due to the panic caused by the situation incurred heavy losses. On the other hand, those who waited patiently have now been rewarded with immense profits since Sensex saw a growth of about 150% since March 2020.
A critical factor in reducing the risks of equities is to diversify your investment portfolio. By investing horizontally, i.e. in various industries and different companies, you are essentially minimising the risks since you’re not putting all your eggs in one basket. Fluctuations and troubles in the market that affect the share value of one company or even industry can be counterbalanced by equity investments made elsewhere.
A consistent investment strategy also helps minimise the risks from volatility. By consistency, we mean that the investments you make are scheduled rather than a one-time investment. You put more money into your portfolio periodically. It can either be a fixed amount that you add or change it by monitoring how your existing equities are performing. This strategy is called rupee-cost averaging. Such strategies and consistencies help manage risks by taking decision fatigue out of the picture. Additionally, consistent investment over a long period results in higher returns than the interest that your cash investments, such as bank account, fixed deposits, etc., might accrue.
Key Takeaway
Equities might seem like a risky investment, but they are your best friend to build wealth in terms of long-term investments. In any case, short-term or long-term investment, direct or indirect, the choices you make must be well researched and strategic. Furthermore, diverse asset allocation is crucial for any investor.
Professional help is another factor that mitigates risks since it saves you from paralysis that can occur when confronted with so many choices. Feel free to reach out to us for any help regarding your investment portfolio.
