Direct equity essentially means that you invest directly in the stock market. To do this, you will typically need to open a demat and a trading account and invest in the markets through a stock broker. Once that’s done, you can buy shares of companies directly from the stock market. In other words, you can purchase the shares of the companies that are listed on stock exchanges like the NSE and the BSE. Direct equity investment can be very rewarding. Simultaneously this is also true that risk of loss in direct equity is high.
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What is Direct Equity?
Reasons to invest in Equity
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Benefits of Direct Equity:
- Profit Potential: Equities have the potential to fetch good returns. In fact, these returns can potentially be a tad bit better than most other investment options. Equities are known to give returns when you stay invested for a long run.
- Potential returns that tackle inflation: Equity shares have the potential to give returns that are higher than inflation. This matters because any returns lower than inflation can mean you lose your purchasing power.
- Dividend Income: The dividend is the income of the company that it distributes to its shareholders out of the profits. The dividend income acts as a source of income for the shareholders of the company. It would not be wrong to say that dividend is one of the ways through which an investor earns a return on his investment. The rate of dividend varies from company to company according to their profits. Most long-term inventors prefer investing in those companies which have a good and consistent record of distributing dividends to the shareholders.
- Exercise Control: When you invest in the stock of a company, you get the voting rights in it. Therefore, with the purchase of shares of a company you can exercise control and get ownership in the company. You can even participate in the shareholders or any other important meeting of the company.
- Right Over Assets and Income: When you purchase the shares of a company, you get a part of the ownership in the company. This makes you the owner of the assets that the company owns. Also, investors can receive a share of the profits through dividends. They also stand to indirectly benefit when the company makes profits over time by way of an increase in the share’s value.
- Diversification of Portfolio: Equity markets provide investors an opportunity to diversify their portfolio. Diversification of portfolio helps in risk management and protects you from volatile fluctuations in the stock price. What makes diversification beneficial to the investor is the fact that underperformance of one sector can be compensated with the outperformance of another sector.
- Bonus Shares: Many times the companies decide to issue bonus shares to their shareholders. Bonus shares can be said as a type of dividend where the companies give the shareholders free shares. On numerous occasions, the bonus shares are given in place of dividends.
- Right Shares: Whenever a company requires further capital for expansion or any other business use, it issues the right shares. Right shares are those shares which are first offered to the existing shareholders of the company. The current investors have priority over other general investors during the right issue of shares. Right shares are generally (not always) issued at a price that is lower than the current market price of the stock. Therefore, the existing shareholder can take the benefit of purchasing the shares at a lower price or they can pronounce their right in someone’s favour to get a value of right.
- Stock Split: Stock split is another advantage of equity shares. Stock split means splitting the shares into parts and reducing the price of shares, leading to a higher interest of investors. The reduction of share price makes the stocks even more liquid and higher volumes lead to a spike in the price if the company is performing well. Thus, the stock split proves to be very beneficial for investors in the long run.
- Liquidity: Liquidity is one of the main advantages of investing in equity shares. Liquidity means the volume of shares that are traded on the stock exchange. When you purchase the shares of a company, you have the option to easily sell them on the exchange. The availability of buyers to purchase your stocks during the market session makes the equity market appealing. Therefore, whenever you are in urgent need of cash you can easily sell your stocks on the exchange and get money credited into your bank account.
- Share in Growth: When you invest in the equity market you become the owner of the company. So being a shareholder of the company you get the opportunity to witness the growth and rise of the company. As an investor, it is a wonderful experience to be a part of a company that rises from the bottom and reaches glory. Furthermore, you also get the reward of the growth of the company in the form of appreciation of the share price.
- Tax Advantages: Investment in equities has several tax benefits. The capital gains on returns on equity shares are taxed at a much lower rate in comparison to other countries. There is no lock-in period associated with equity shares from the viewpoint of taxation. However, there are two types of taxes levied based on the time you stay invested: Long-term capital gains (LTCG) and Short-term capital gains (STCG) tax. According to the last changes that took place in 2018, the LTCG above Rs.1 lakh are taxed at 10% without indexation. The STCG is taxed at 15% with the benefit of indexation.
- Residual Claim: The equity shareholder has the right to make a residual claim on the assets and income of the company. This claim can be made on those assets or income that are left after paying all the stakeholders like debenture holders, lenders, etc. This advantage can become a major aspect if a company goes under. This is because, you can still lay claim to something from the company and get some of your investment back, instead of suffering complete loss.
Asset allocation stabilities your risk and reward by allocating your assets
One place to hold your investments
Financial instrument that holds some type of monetary value
Getting the shares of a private corporation to the public in a new stock issuance
Why is Direct Equity important?
Since the direct equity option requires that you make the investment decisions yourself, it is a better choice for seasoned investors who have a good idea about how the market functions. Timing the market and taking buy, sell and hold decisions need to be done frequently. It is also important to keep yourself updated about the various developments nationally and internationally. So, investing in direct equity is a good choice if you can handle these requirements. It is operationally very difficult to invest across various stocks and sectors to have a well-diversified portfolio. In contrast, an equity mutual fund with a diversified portfolio can be bought in a single transaction. Stocks are volatile instruments whose prices change everyday. There are numerous reasons which explain the behaviour of stock prices. To start with, you can think of market forces i.e. theory of demand and supply. If the number of people who want to buy a stock are more than those who want to sell it, then the price of stock rises.
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