Updated: Jan 7, 2022
In this section we will explore another type of investment class – equity.
Equity investment in layman’s explanation is: to buy a company and making profit when the valuation of the company grows. The explanation may be too simplistic, nonetheless the basic idea is as a shareholder of the company, investor is offered to enjoy a piece of ownership in the company. Through the ownership, investor enjoys the benefits from both appreciation of the company’s value and also the dividend if it realises profit from its business activities. The investment fund raised is then used to further grow the company’s business, for example to buy manufacturing equipment, factory, warehouse, land, or to finance an acquisition, diversify into a new product line and so on.
In contrast to real estate, to a common investor, equity investment can be pretty passive once investor has done thorough due diligence before the investment. Most of the time, the business will be operated by the business owner who are familiar with the in and out of the business operation. However, in some cases, the founder of the company will quit the business and an experienced management team will take over the company to drive the business to the next level.
But what makes the equity market extremely desirable for an investment? Let’s break it down for our avid dear readers:-
1. Wealth Amplification - Fast Payout
Real estate in general doubles every 10 years. Equity can triple in 10 years.
2. Flexibility - Tailored To Your Risk Level
Sometimes people need flexibility. The reason is simple: we want to have more options so that we can react differently under different circumstances.
3. Value Investing - Remaining Essential
The money we invested is used to develop the business. Businesses provides a service or a product that would always remain relevant and needed.
4. Diversification - Basket Shopping
Investors can reduce the concentration risk by holding many investments. You can buy many individual stocks in your portfolio or a mutual fund, which could be invested in stocks, bonds or a combination of both. Avoiding the risk associated with one business by owning many is called diversification. By diversifying your investments, the performance of one company won’t drastically impact your overall performance.
5. Demographics - Growing Markets
For the last 50 years, the world population doubles from 3.63 billion (1969) to 7.63 billion (2018). On the whole, the economy will keep growing as long as the population is increasing. With the increase of the population, we need to do things in a more efficient way. We need to produce goods faster, take the orders in a snap of finger, deliver the products quicker and analyse the buying behaviours more accurately.
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