Asset Building through Equity

Part  II :   Asset  Building  Through  Equity

CHAPTER 6: Why Should I Invest In Equity?

 "Balance is the key to success in all things. Do not neglect your mind, body, or spirit. Invest time and energy in all of them equally - it will be the best investment you ever make, not just for your life but for whatever is to follow."

                                                                                         - Tanya Wheway

Why?

 For all the recent gyrations in the stock market, equity continues to be a better bet than fixed income instruments like government securities or bank deposits. Even the government backed Unit 64 plan defaulted and caused heavy loss to big investors. From this we should understand that risk lies in all sorts of investments.

Let us take the investment in Mutual Funds. We mainly do this because of our unfounded belief that fund managers are financial wizards and will definitely give a good return inspite of any kind of market situations. See the following table of performance of mutual funds during the year 2008-2009.

PERFORMENCE OFMUTUALFUNDS

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                                          Rate of Return (%)   

Equity                          6Months        1 year        3 years             

ING Dynamic Asset      2.88           0.48           --

UTI Dividend Yield    -12.66        -20.05       1.59

Birla Sun Life             -14.47        -21.50      -4.88

IDFC Imperial Equity -14.04        -24.28       2.37

Note: Returns calculated for less than one year are absolute Returns and returns calculated for more than one year are compounded annualized.

The above table clearly exposes the financial wizardry of fund managers. Many of us do not want take risk on our money but are willing to donate our money to unknown fund managers for taking that risk.

Nobody in the market can foretell what is going to happen in the future. Market changes minute by minute. Do remember it is the market that makes the wizards and fools depending upon their time of entry. Hence I would like to reiterate once again it is better to take risk on your own instead of believing on somebody else’s unproven capability.

Let me explain how a long term investor who has no knowledge of the market movements might have fared if he has invested in good companies. There are many families in India who used to invest in some shares of good companies ( Century , Ponds etc.) as soon as a girl child is born which has taken care of the marriage of the child. I have given a list of stocks and their prices with respective years. Compare their prices today and the percentage of appreciation.  Many of these stocks have also multiplied many times through bonus issues.

Early and late 80’s

Company                                Price in RS.

McDowell                                     7

MRF                                             8

Tata Tea                                      9

L&t                                             30

Ponds (Now HUL)                    22

Grasim                                      30    

Revathi Eq.                               12

Hero Honda                                9

MAY  2003

JP associates                         40  

Sail                                            12

Century                                     26

Tata Steel                              150

June  2010

Githanjali Gems                    120

Siyaram                                 170

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You can check yourself the advantage of equity investment from the above list.

WHAT IS EQUITY?

Securities representing equity ownership in a corporation, providing voting rights, and entitling the holder to a share of the company's success through dividends and/or capital appreciation.

In the event of liquidation, common shareholders have rights to a company's assets only after bondholders, other debt holders, and preferred shareholders.

                                                                                                           

WHAT IS EQUITY INVESTMENT

Equity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and funds in anticipation of income from dividends and capital gains as the value of the stock rises. It also sometimes refers to the acquisition of equity (ownership), participation in a private (unlisted) company or a startup (a company being created or newly created).

When the investment is in infant companies, it is referred to as venture capital investing and is generally understood to be higher risk than investment in listed going-concern situations.

WHAT  DETERMINES  SHARE PRICE  ?

Ultimately, at any given moment, equity’s price is strictly a result of supply and demand. The supply is the number of shares offered for sale at any one moment.

 The demand is the number of shares investors wish to buy at exactly that same time.

 The price of the stock moves in order to achieve and maintain equilibrium.

WHO ARE ALL THE FELLOW PLAYERS? WHAT CAUSES THE GYRATIONS IN THE MARKET? WE WILL DISCUSS IN THE FORTH COMING CHAPTER.

Dr.Felisleo

28.11.2010

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