Equity Investments : Meaning, Benefits, Taxation and More

Updated on: Jan 13th, 2022


8 min read

Investing in equity shares helps to beat the inflationary pressure by delivering a higher rate of return as compared to other havens. However, you need to consider other complexities before investing. 

What are Equity Shares?

In a company form of organisation, the total capital of the business is divided into smaller units known as equity share. When an investor subscribes to the equity share of a company, contributes to the total capital of the business and he becomes a shareholder. For the company, such a contribution is like a liability on which it needs to give returns to the shareholder.

Investors earn returns in equity investing by way of dividends and capital appreciation.  Along with monetary benefits, the holders of such shares also get voting rights in critical matters of the company. Basically, they are treated as owners of the company wherein the ownership is limited to the extent of the shares held by them.

A business issues shares primarily when it is in need of funds for growth and expansion. It approaches the investors by means of an Initial Public Offering (IPO). IPO is treated as a primary market wherein the equity shares of the company are offered to the general public for subscription for the first time. Afterwards, the shares get listed on a particular stock exchange and exchange hands through frequent trading.

You can subscribe to the IPO and these shares can be sold on a stock exchange like NSE once you are allotted shares. After you subscribe to shares of the company, the record is maintained at depositories like NSDL and CDSL. When the company needs to distribute dividends or bonus shares, it will get the shareholders’ list from these depositories and credit the dividends directly into your bank account.

Why should you invest in Equity?

Individuals have financial goals which motivate them to invest in specific havens. However, the choice of investment avenue can make or break the realisation of financial dreams. It is because of the forces of inflation and taxes. These tend to reduce the purchasing power of your money and impede faster wealth accumulation.

If you have been restricting you investments to only bank fixed deposits (FDs), then you might face difficulties in protecting your wealth. We can understand this with the help of an example. Imagine that the average annual returns earned on a bank FD is 8%. Assuming an individual falls in the highest tax bracket i.e. 30%, his returns on the FD after tax would be around 5.6%. It means that his wealth is losing 2.4% every year. In other words, if he begins with Rs 100, then at the end of a period of 10 years the purchasing power of his wealth reduces to Rs 76. Hence, inflation and taxes are always going to stay but your choices of investing can bring about a lot of difference in your rate of return.

Conversely, if you consider equities, these have delivered average returns of around 12% annually. With equities, you can think of protecting your wealth from getting lost to rising inflation and simultaneously earn a higher real rate of return. Suppose if you purchase an equity share of a company at Rs 200 and its price increases to Rs 250,  then you can sell the share on the stock exchange to earn a profit of Rs 50.

Investors make huge profits when the shares are way above the price at which you bought them initially. If the price of an equity share A increase to Rs 200 after five years from the time when you bought it at Rs 100, it shows that you have doubled your money. On top of it, you receive dividends, bonus or rights shares, which further maximizes your returns.

How do prices of Equity Shares move?

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.

Conversely, if the number of people who want to sell a stock are more than those who want to buy it, then the price of stock falls. At this juncture it becomes important to know that what affects the demand and supply of stocks; which in turn causes investors to like/dislike a stock.You might have noticed headlines flashing on the news channels throughout the stock trading session. Basically, if the investors come across a positive news about a company like growth/expansion plans, projects approval by the government, the stock prices rise.

On the contrary, any negative news like legal suits filed against a company or rejection of a project makes its stock prices fall. Even the equity analysts estimate about the future value of a company is based on company’s earnings projection. Ultimately, anything which increases the earnings and value of a company causes its stock prices to rise and  vice-versa. Apart from this, you may use financial ratios to know the intrinsic worth of the company.

How are Equity Shares taxed?

When you invest in shares, you make capital gains on the sale of shares which are taxable. Capital gains is the difference between the selling price and purchase price of the equity share. The rate of taxation on capital gains depends on how long you stayed invested in the stocks. When you sell an equity share, listed on a recognised stock exchange, within one year from the date of purchase, you earn short-term capital gains. These will be taxed at the rate of 15%.

Conversely, if you sell a listed equity share after one year from the date of purchase, you earn long-term capital gains (LTCG). LTCG in excess of Rs 1lac are taxable at the rate of 10% without the benefit of indexation.

Are Equity Shares better than Equity Funds?

If you are investing directly in shares, there are a lot of complexities that you need to take care of. To start with, you have to examine a stock and assess if valuations are attractive. Investing in stocks tends to be a dynamic process because the business prospects change everyday due to immense competition. On top of this, one should also understand how does the stock exchanges like Sensex and Nifty functions.

Moreover, you would require relatively higher initial capital to build a well-diversified portfolio.If you take the case of equity funds, it is a more convenient way to enter stock markets. There’s an experienced fund manager who would take care of your portfolio. You need not worry about the market movements and other decisions related to portfolio management.

More importantly, you can start systematic investment plan (SIP) in mutual funds with as low as Rs 500 every month. In short, you can achieve similar level of diversification at a smaller amount.

How to Invest in Equity Funds?

Investing in Equity Funds is made paperless and hassle-free at ClearTax. 

Using the following steps, you can start your investment journey:

Step 1: Sign in at cleartax.in

Step 2: Enter your personal details regarding the amount of investment and period of investment.

Step 3: Get your e-KYC done in less than 5 minutes.

Step 4: Invest in your favourite equity fund from amongst the hand-picked mutual funds.

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Quick Summary

Investing in equity shares can protect against inflation, provide higher returns. Equity shares represent ownership in a company and give rights like dividends, voting. Stocks are volatile, influenced by market forces, news, earnings. Tax on capital gains varies depending on the holding period.

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