We should understand what exactly you are buying when you buy an equity. Investing in equities is just similar to own a business.
When you invest in shares of a company, you are not only providing finance to the company, but providing capital to that particular company which is known as an equity share. It means you are taking up the part of the ownership in that company. Investment in equity is undoubtedly have greater risk as you are entrusting performance of the company with the job of managing risk on behalf of you.
In what kind of business you should invest?
Normally, the new comers who are investing in equity should focus on the potential of returns received should be at least equal to the bank interest rates. You should determine the qualitative factors to invest your money into a business which ensures the security of your money in a long run. Business itself is also entitled to aspire for the same security aspect. Ideal business should have horizons where profits can be determined. There are various external factors that determine the direction and growth of this activity. While business planning all these factors are considered to sustain the growth of the business over the period of time. Business operations would have to be evaluated from market feedback resulting into profitability described in the financial statements.
All these concepts apply to the stocks. We know the document called Annual Report of the company; which is the most basic source to know the company’s operations and quality of the performance. Annual report explains the nature of operations and the external factors affecting the performance of the company during the year. To get a fair idea about company’s reputation and stability by keeping track of the position of company’s product in the market. You can also keep track of company’s quarterly financial statements. All these are the parameters to decide which stocks will give maximum and stable returns.
Role of Equity Holder in the company
As an equity shareholder, you are delegating authority to others to run the organization you have a stake in. The company is answerable to their equity base shareholders. Thus, as you are a joint owner, you have delegated the operations of the company to the professional managers and the employees. In turn management is responsible to its shareholders by communicating the performance of the company through the balance sheet and the AGM. Equity shareholders can even voice their opinion on the performance of the company.
In fact, shareholders can actually participate in constructive criticism of the operation of the company.