Equity for Dummies

Equity: the very sound of the word increases your heart beat with grand visions of wealth and fortune, because that's the easiest way to doing business on your own. Business??? Yes, if you come across the term 'holding equity' in a business, it suggests that you are taking some interest in a particular business and you are linking your fortune with that of the company.

So, what is EQUITY/STOCK/SHARE?

STOCK, as the name suggests, is a stock of something; in the case of investing, it's a stock of a particular business divided into smaller fragments so that a large number of limited income people ( like you and me ) can also buy ( part of ) a big business like Infosys or Zee or Reliance.

A SHARE is the smallest portion of stock, which gives you the right to a part of the company, without any liability.

And finally EQUITY; a term that has many hidden meanings. Let's first see what the Cambridge dictionary says : "equity: the value of a property after you have paid all charges associated with it". Now, that definition hides several meanings.

"The value of a property" : How does one identify it? In fact, this very act of "finding the value" drives the stock market. Every individual is trying to find his/her own value for a property(company) and that drives the price of the shares on the Market.

So broadly what EQUITY means is:

a: Equal parts of the company
b: Equal rights to the owner

In a nutshell, by holding a Equity in a company we are basically buying a small fragment of a company, in other words we are buying a BUSINESS with our money!

This concept of "owning" a company is very important for those who are SAVERS and INVESTORS,and those who think they fall under those categories should never forget that a particular share grants them the ownership of a company. So when we buy a share we should be extra careful about the nature of business and financial strengths/weaknesses of the company.

But there are some other important elements in the Market which have created a class of people called the SPECULATOR. These people really play a very important role in the functioning of the Market, they help the Market derive a fair ( usually??) value of the company. (The stock market is no different than a whole-sale market for vegetables, where traders decide the price based on demand and supply and we as individuals are conveyed those prices when we buy vegetables from the vendors).

Now, its really interesting to play the role of a SPECULATOR/TRADER (as against the INVESTOR) as you are in the driver's seat, actively participating in the pricing of the share through your trades, while an investor just takes the price and analyses it based on the company's value which sounds boring. But, the role that you should take depends on your psychology and appetite for risk. If you ask me, be a little bit of both. Use whatever money you do not want to lose for investing and use for speculations the amount whose loss won't bother you much (termed risk-capital). While INVESTING is anytime better than mere SPECULATION/TRADING, your gains could be higher and you can also live the feeling of being in the driver's seat if you do a little bit of trading.

A point to take home : A share gives you the ownership of a business.