Equity Investment Fundemantals And Risk

Equity Investment Fundemantals And Risk

       Equity investment is also sometimes referred to as acquiring ownership in a private company. Equities are held by private individuals in the form of mutual funds and other forms of pooled investment vehicles.

      The most important aspect of equity investment is selection of valuable stocks from the list. In most cases, stocks are selected based on their past performance, earning potential and appreciation over a period of time. Since, this is a long-term investment, it is important to identify stocks of firms that have the capability to earn more than the firm’s capital cost. Often, investors get confused with growth companies to be growth stocks. For a growth company to be referred as a growth stock, the company must show performance that is constantly escalating with every passing year. This performance must also reflect in the net earnings of the company. The most convincing example for this strategy is investment in dot-com companies. Several dot-com companies registered on the exchange were growth companies that showed the potential to grow. However, this growth was unable to translate into earnings. As a result, these stocks crashed eventually.

       However, there are various disadvantages of equity investments. The foremost is the fee that is paid to fund managers in the form of entry or exit fees. There are also fund management firms that levy annual fees on investors for the purpose of maintaining their funds. Another disadvantage is that the investor does not have much choice in selecting the stocks to be picked up for investment. In certain cases, the way funds are diversified might not meet the needs and financial objectives of the investor.

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