Equity – What Everyone Must Know
Mutual fund investments are the most sought after these days. Lot of awareness is being created about mutual funds as people come forward in huge numbers to invest in them.
But among them, how many realise the fact that a huge portion is invested in equity?
The answer is very few.
Even those who invest in equity lack a clear understanding of equity as a product.
So, what is equity?
Equity Means Ownership
Equity is a portion of ownership of a company. Any firm will have multiple shares and each share can be called a portion of ownership.
For instance a person by the name X and his friend Y registers a company with a share capital of 1 lakh (which is the value of the company) with each contributing 50000 rupee. At the time of registration, each were having 5000 shares each with 10 rupee face value. Gradually when the company flourished, the gains turned out to be much higher than the share capital. The company opens multiple branches, the only funding being the profit.
In this scenario, an investor namely Z comes willing to invest in the company. X and Y does a calculation of the current value of the company with the help of a qualified personnel. Here, they also take into account of the company’s goodwill and the hard work they have put in all these growing years. As per the calculation, the current share value stood at 1 crore and the person Z invests 33 lakhs and becomes a partner. Here, the invested amount, 33 lakhs can either be used for further expansion or can be shared among the other two partners, i.e. X and Y.
From the above instance the point to be noted is that the share value which was 1 lakh became 1 crore upon company’s growth.
The equity which was 50,000 (Z’s share would then be 30,000) in the beginning has risen to 33 lakhs with a face value of 1000.
How Risky is Share Market?
There is indeed risk involved in Investing in Share markets . A company’s performance reflects in its value of shares. Investors demand towards a specific company’s share and its supply in the share market too affects its value. Any investor before venturing into equity will check the scope of the company. Any positive news which emerges about the company increases its share value while a bad phase or a mismanagement brings its decline.
As said above, equity is the portion of the ownership of a company. At the time of investment the amount might be smaller. But when the company grows and gets listed in share market, it will have multiple shareholders. This increases the demand for its share which in turn increases its value. This is the reason why share values of listed companies always fluctuate.