A highlight on equity investing as a zero-sum gameJuly 25th, 2022 Mutual Fund
What is Equity investing and is it a Zero-Sum Game? Well, we are going to give you a clear picture of this question, through this blog. First, let's understand what a zero-sum game exactly means.
What is a zero-sum game?
Suppose a couple of friends have made a bet on something and one of them wins, which means the first one wins. But it also means another one would subsequently lose his money. The amount of someone's profit is equal to someone's loss. The total of gains and losses adds up to zero. This is an example of a zero-sum game. Similarly, there are a lot of people who view the mode of 'Equity Investing' as a zero-sum game. It basically means that if someone is gaining money from it, someone would have lost it. This popular belief represents the stock market as a gambling den in front of the masses, which brings a sense of skepticism while investing in stocks.
However, when you view and study the stock market through data analysis, every participant has a proven track record of having made money in the stock market over a longer period, which proves that investing is not a zero-sum game.
Although stock markets may look like a zero-sum game in the short term, where one trader gains all the money while the other one loses it. Both can't win together in the short run. For example, the Sensex moved up from a level of 1048 in 1990, to nearly 36,000 in 2019, and all investors who stay invested have gained. There is always a sense of security in the long run.
This has been the discussion about the 'zero sum game' and its benefits in the long run. Now, let's dive into the phenomena of equity investing.
What is Equity Investing?
The investment you make by purchasing shares of a company in the stock market is Equity Investing. While investing, each investor firmly expects that the value of these shares will grow with time. If the value of equity investment rises, the investor can receive the monetary equivalent of their equity by selling the shares. Another way to use your profit is to strengthen your portfolio by keeping those shares for further enhancement. Also, equities can strengthen a portfolio’s asset allocation by adding diversification.
What are the basic Benefits of Equity Investing?
One of the biggest benefits of an equity investment is the probability that you can get exponential growth in the value of the principal amount invested. Capital gains and dividends are two forms of profit made by an equity investor. Also, with time, due to inflation, the value of money decreases. The profit made by investing in an asset class fulfils long-term goals such as children’s education and retirement. Investing in equities can help you do so as they can generate inflation-beating returns in the long run. A diversified investment option is offered by the equity fund , which gives the luxury to opt for a minimum initial investment amount. Other investors require much more capital investment to attain the same level of diversification as an equity fund. If a company wishes to raise additional capital in equity markets, the equity investors have the luxury of enhancing the investment through rights shares.
Drawbacks of Equity Investing
Equities tend to be 'inherently volatile'. The prices hugely depend upon several factors which may be internal and external. And the hardest part is to accept the fact that it is beyond any control of retail investors. The swing in prices can be extreme. In such a scenario, patience with a long-term approach is the ultimate key. In the long term, the quantum of volatility comes down by a fair margin.
Why is Long-term Investment beneficial?
While investing in stocks, you are effectively buying companies which keep growing in line with the economy. Over a period when a company's growth enhances, the profit of that company keeps on increasing, which increases the aggregate profit of its shareholders. It's not just a theory, the leading companies in India have consistently grown over the years and their shareholders have reaped an enormous amount of profit from it, and continue to do so. Long term investing is more like growing a tree in your own garden. As long as the tree keeps growing, the fruits available from the tree also keep increasing.
How can you start equity investing?
Now here lies the real part. After getting all the beneficial set of information regarding why to invest and where to invest, we are moving our focus to the question of 'How to start Investing'
There are two straight ways to invest into an asset class : - Direct Investment through Stocks and Mutual Funds.
Direct Investment through Stocks
If you opt to invest in equities directly through stocks, you must open a demat account as well as a trading account to begin with. The holding of shares is done by the demat account in an electronic format, and the trading account provides the medium to buy or sell orders along with the broker. The biggest advantage of direct investment is the possibility of substantial growth if you put your money in the right stock.
To Do's -
- Your call to buy a particular stock should be backed by proper research.
- You should remain up to date in terms of understanding the market trends of late.
- Don't invest straightaway. First try to learn about the stock market and its tiny details through various informative reports or blogs.
Over a period, Mutual funds have become a quite popular financial medium for investing. While investing in direct stocks entirely depends upon your own selective skills, mutual funds have a fund manager to pick stocks on your behalf. The market research is done by the manager who keeps on tracking the market movements and makes his mind accordingly. In simpler terms, mutual funds are all about someone else using their expertise to risk on your behalf.
To Do's -
- While investing in an equity mutual fund, always have a look at the fund’s long-term performance. Sometimes, short term benefits attract investors, and eventually become a headache in the long term.
- Always try to gather extensive information regarding the fund's fundamentals before investing in a mutual fund. Also, identify the investment composition of the respective funds.
- An amount is charged by the fund houses for various fund management costs. This amount is termed as expense ratio. It is low for direct plans and high for regular ones. The higher ratio can minimise your overall profit. Therefore, try to select a plan on the basis of expense ratio .
Our motive, as always, was to provide you with a fair idea regarding the basics of equity investing and how it is done. We hope this blog will be helpful for you in the future, when you would start your investment journey, if you haven't already.
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Mutual Fund investments are subject to market risks. Read all scheme documents carefully. The past performance of mutual funds is not necessarily indicative of future performance of the schemes.