Equity represents the monetary value of a share you own in a company. Through equity investment, you secure partial ownership and become a shareholder. As a shareholder, you’re entitled to a share of the profits generated by the company and have the right to vote on board-related matters. With the potential for profits through price appreciation, investing in equity can be a valuable opportunity worth considering.
Why Are Equities Volatile?
Investing in financial markets may be a rewarding experience, but it also has its ups and downs. Among the different investing options available, equities — also known as stocks — tend to attract the attention of most investors. While equities have the potential for big profits, they also have high volatility. So what exactly is causing this volatility, and why are stocks considered riskier than other investments? Let’s take a look at the world of equities and see what variables contribute to their volatility.
How To Invest In Equities
You can invest in this asset class in two ways: directly through a stock exchange or indirectly through mutual funds.
● Directly Through Stocks
If you’re interested in investing in equities through stocks, you must open trading and demat accounts. Your shares will be stored electronically in the demat account, while the trading account allows you to buy and sell orders through your stockbroker. Here are some of the advantages of investing directly in equities through stocks:
- Wide range of investment options: With direct equity investment, you can access a vast range of stocks. This allows you to select the stocks with the best potential for long-term growth and wealth creation based on your risk tolerance. You can choose to invest in large-cap, mid-cap, or small-cap stocks.
- High potential for returns: You can make significant gains with a direct equity investment by choosing the right stocks. However, your success is dependent on your stock-picking skills and ability to sell at an opportune time.
When investing in stocks, it is crucial to manage risk carefully. This entails conducting thorough research on various parameters before purchasing a stock, staying current with the latest market updates, familiarizing oneself with stock market terminology, comprehending companies’ balance sheets, and understanding their order books. As long as sufficient time is available, directly investing in stocks can be a good option. It may be wiser to consider the next alternative if you don’t have enough time to spend on trading and analyzing the market.
● Through Mutual Funds
As you plan your financial goals, mutual funds are a popular instrument to consider. Here are some advantages of investing in equities through mutual funds:
- Professional Management: Instead of relying on your own stock-picking skills, a fund manager will make investment decisions on your behalf. You can benefit from their expertise, research, and market monitoring.
- Diversification for Risk Management: Mutual funds diversify your investments across different industries and sectors, which reduces the overall risk associated with equity investments. Optimum diversification is essential for long-term success.
- Low-ticket Size for Easy Entry: The ticket size for mutual fund investment is very small. As your income increases, you can gradually add money, helping you build a large corpus of funds over time.
- High Liquidity for Easy Withdrawals: Mutual funds are highly liquid, allowing you to convert them into cash quickly whenever needed. Upon placing a redemption request, the money can be credited to your account the next day, subject to applicable exit loads.
Investing in mutual funds requires attention to crucial details such as long-term fund performance, fund fundamentals, and expense ratio. It’s crucial to consider the fund’s performance over time, its ability to deliver consistent returns, and its performance during bearish market conditions. Fundamentals such as investment composition, entities the fund invests in, and the fund manager’s experience are also essential. Additionally, investors need to be mindful of the expense ratio, as it represents the amount charged by fund houses to manage the fund, and a high ratio can significantly impact profits.
Key Factors Affecting Equity Volatility
- Investor Behavior: Emotions, biases, and impulsive behavior can lead to volatility in equities. Market sentiment can also influence stock prices.
- Market Events and News: Positive or negative news related to a company, industry, or the broader economy can cause sudden fluctuations in stock prices.
- Uncertainty and Speculation: Financial markets are inherently unpredictable. Speculative trading and constantly evolving expectations play a role in determining price volatility.
This information will help investors understand the main drivers of stock price movements and make informed investment decisions.
Bottom Line
Equities are a powerful option for building wealth, but investors need to understand the associated risks. Being aware of factors that can influence price volatility is essential for successful stock market investing. By taking time to research and assess the various investments available, investors can make prudent decisions and find success in this asset class. Investing in equities can be a rewarding experience when done wisely.
