What Are Equity Shares? Why Do You Need Equity Shares In Your Investment Portfolio?

Equity Investment refers to the money you invest in a company by purchasing the shares of that company in the stock market. Equity Shares are usually traded on the stock market. Equity Investment is popular among investors because they are a high-return investment option.

Conventional wisdom suggests that young people can afford and prefer more equity exposure in their investment portfolio due to the high possibility of earning high returns over time. However, high equity exposure becomes riskier if you are nearing retirement.

While so many financial intermediaries and financial asset companies advise you to invest in equity, let us tell you in simple terms why you need equity shares in your investment portfolio.

Profit Potential

Equity Shares have a high potential of fetching high returns on a long-term basis. The equities often yield higher returns when compared to other investment options. With in-depth market research, equity trend analysis, appropriate stock picks and a solid trading strategy, equity stocks can earn you unparalleled returns.

Diversification of Investment Portfolio

Equity markets offer investors the opportunity to diversify their investment portfolio. Diversification of your investment portfolio balances risk and protects your portfolio from volatile fluctuations in the stock price.

You are probably wondering how equity shares can help you in risk management when it is in itself a risky investment option. Here is how. When you add equity shares of different companies of different sectors to your portfolio, and for some reason, certain sector underperforms, then the losses occurring from that particular sector are likely to be compensated by equity shares in your investment portfolio belonging to other, more stable sectors. Hence, while equity investment is risky, it is nonetheless a significant way to diversify your portfolio and mitigate long-term risk.

High Liquidity

One of the main benefits of investing in equity shares is high liquidity. The average volume of shares in BSE and NSE is notably high. More than often, the volume of buyers of your equity shares during a market session is high. This makes the selling of equity stocks easy on the stock exchange. The money also gets credited to your linked bank account quickly and transparently. Hence equity investments can be easily encashed and thus are considered liquid assets.

SEBI Protection

The stock market in India is regulated by the Securities Exchange Board of India (SEBI). The regulatory framework built and managed by SEBI ensures investor rights protection. SEBI has been instrumental in diminishing the fraudulent activities undertaken by companies and individuals in the stock market. It has always made decisions in the best interest of the investors and has ensured transparency of transactions for every party involved.

Bonus Shares and Rights Shares

Often when companies are doing well, they decide to issue “Bonus Shares” to their existing shareholders. Bonus Shares are free shares issued to existing shareholders. They are usually issued to shareholders instead of dividends. This way, your investment value increases whether or not the share price increases.

Every time a company requires additional capital for expansion, it can issue “Rights Shares”. Rights Shares are shares that are first offered to existing equity shareholders of the company. They are usually issued at a price lower than their current price in the stock market. Hence when a company issues rights shares, the equity shareholders have the opportunity to acquire more equity shares of the company at a price lower than its market price.

Tax Advantage

Investment in equity shares comes with several tax benefits for the investors. Compared to other countries, the returns and capital gains on equity investment shares are taxed at a lower rate in India. From the viewpoint of taxation, there is no lock-in period associated with equity shares.

Currently the Short-Term Capital Gain Tax (STCG) levied on equity shares is 15% with the benefit of indexation, and the Long-Term Capital Gain Tax (LTCG) levied on Equity Investment above Rs. 1 Lakh is 10% without indexation.

Exercise Control

As an investor, when you invest in equity stocks of a company, you become entitled to voting rights. When you purchase equity shares, you essentially get ownership of the company. This gives you the right to exercise control. This also gives you the right to participate in shareholder’s meetings and other such meetings as per the intensity of your shareholding.

Collateral Against Loans

Another major benefit of equity investment is that as an investor, you can pledge your equity investment in equity mutual funds or qualified equity shares with a bank as collateral against a loan. Banks allocate loansupto to 50% of the value of the qualified equity shares or equity mutual funds you own.


Investment in equity shares gives you a tremendous amount of flexibility. As an investor, you can hold, sell or buy equity shares whenever and for as long as you want. You can invest in small-cap, mid-cap or large-cap companies based on your research, budget, financial goal, and experience. Investing in small or large sums of money is totally at your discretion.

Limited Liability

Whether we like to accept the hard truth or not, the fact remains that often investors invest in companies that end in operational losses or bankruptcy. In such adverse circumstances, as a shareholder, your liability is limited to the amount of investment you have made in the company and not a penny more.

While there are plenty of reasons why you must add equity shares to your investment portfolio, you must remember to invest intelligently. Ensure you are driven by facts and not by emotions.

While equity undoubtedly has great potential to generate high returns, you must understand its risk and invest as per your risk appetite. You must also understand that investing all your corpus in equities is not wise. Remember to diversify your investments and invest in different asset classes. Even if you have a zilch of doubt, it is advisable to take recommendations from Eureka’s qualified financial advisors.

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