Financial investments have enough options to choose from to perplex even the experts. They vary from basic savings schemes to complex secondary market trading. Mutual investment companies have sprung up around every street corner and tax exemplaries have just added to the ardor. The optimum mode of investment depends upon the investable sum, interest vs security trade off, the reason for investment(for example, short term investments like stocks, shares and bonds can be sought for anticipated down payment for a loan while PPF and bank FDs are advisable for retirement related investments).
Equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. Simply speaking it is the total assets minus total liabilities. If liability exceeds assets, negative equity exists. In an accounting context, Shareholders’ equity represents the remaining interest in assets of a company, spread among individual shareholders of a common or preferred stock. And in real estate, equity is the net worth of the property, obtained when the liability against the property is subtracted from the property’s current value.
Equity investment, in the case of investment in shares, is the money that is invested in a firm by its owner or share holders which is not returned in the normal course of the business like profits. Investors recover it only when they sell their shareholdings to other investors, or when the assets of the firm are liquidated and proceeds distributed among them after satisfying the firm’s obligations. These two ways of deriving monetary gains out of equity investment are technically called as capital gains and dividend payments. It can be viewed as a loan given to a company by the shareholder that is paid back through company dividends or sale of ownership (loan) rights.
The great majority of equity investors do not actually hold the securities, or certificates. Instead they have an account with a bank or a fund manager who has physical access to these stock certificates. Ownership of shares of stock in a company, especially in the case of equity investments, does not ordinarily entitle one to the responsibilities and rewards of direct oversight of the company. Only those owning common stock in a specific company even approach direct oversight through voting privileges endowed by that particular type of stock. Equity investors in start-up companies are known as venture capitalists.
With respect to investment in property, the property is in the form of stock certificates and any debt is actually devaluation of the security, i.e. decrease in value of the property.
Third and the most common form of equity investment is through mutual funds, also called as pooled share funds. A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities. Mutual fund provides many advantages such as daily liquidity (most important), government oversight, greater returns than individual investment because of mutually bulkier sum advantage and ease of comparison. Though it is a widely prevalent means of equity investment, it certainly has its own share of cons: fees for the professional fund manager, less predictable income and no opportunity to customize (trade as per one’s wish).
Mutual funds can be classified as per their functioning and the type of funds they offer to investors. In that way, they are classified into open-end mutual funds, closed-end mutual funds and exchange traded funds.
All mutual funds by default and by definition are open end funds. Here an investor can buy the shares at any point of time and exit at any time of his choice. Both buying and selling will be at the NAV (Net Asset Value) subject to load factors where ever applicable. Here the investor can liquidate his holdings at will. Selling off of a specified and limited number of shares by the mutual funds at an initial public offering is known as closed end mutual fund. One important difference between open end fund and closed end mutual fund is that the price of the latter is decided by demand and supply of the stock in the market and not by NAVs unlike in the former case. Exchange Traded Funds combine the characteristics of both closed-end funds and open-end funds. Like closed-end funds, ETFs are traded throughout the day on a stock exchange at a price determined by the market. However, as with open-end funds, investors normally receive a price that is close to net asset value.