The goal of virtually all investment analysis is to make an investment decision or advise someone to create
one. Analyzing equities and managing equity portfolios are closely linked.
However, in finance—as in many professions—the real-world application of theoretical or academic concepts can
involve thinking beyond one's speciality and training. Running a group of stock portfolios involves attention
to detail, software skills, and administrative efficiency.
If you want to make equity investments, you will require a deep understanding of financial markets and
investment principles and strong analytical and quantitative skills. Also, Equity portfolio managers'
decisions may influence various investment strategies, including value investing, growth investing, or index
investing.
In short, you need to know the mechanics of equity portfolio management to create and handle a group of
distinct portfolios, ensuring they perform well and as a homogeneous element. Recommendations for equity
investment strategies are based on 3 factors:
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- Your risk profile- are you an aggressive, conservative, or moderate investor?
- Your investment goals & preferences- are you looking for a long-term or short-term investment? How long
you're willing to invest?
- Your thematic preferences- are you specifically just looking for momentum investing or value investing?
In short, you need to know the mechanics of equity portfolio management to create and handle a group of
distinct portfolios, ensuring they perform well and as a homogeneous element.
Recommendation of equity investment strategies are based on 3 factors:
Your risk profile- are you an aggressive, conservative or moderate investor?
Your investment goals & preferences- are you looking for a long term or short terminvestment? How long
you're willing to invest?
Your thematic preferences- are you specifically just looking for momentum investing or value investing?
How do Equity Portfolios Work?
Equity portfolios are collections of stocks that are managed to achieve a specific investment objective.
These portfolios typically consist of a diversified mix of stocks from different industries and sectors,
intending to reduce risk and increase returns.
The equity portfolio return is a function of several investment factors. Factors are indicators that can
help describe stock returns. When you try to get into the details of the factors influencing market returns,
you’ll find that they are intuitive to understand.
Factors are of two main types - macroeconomic and style factors. Macroeconomic factors are broad-based, like
the GDP growth rate, inflation, unemployment, etc.
Style factors are more nuanced and are a quantitative way to describe strategies for outperformance. Each of
these style factors would have proponents among quantitative investors and all types of investors.
Value: This factor aims to capture the premium associated with stocks with low prices relative to their
fundamental value.
Size: This factor says that small-cap stocks exhibit greater returns than portfolios with just large-cap
stocks.
Momentum: This factor bets on the outperformance of stocks that have historically exhibited strong
returns.
Quality: Stocks with strong corporate governance and consistent earnings with low debt are called quality
stocks that tend to outperform.
Volatility: This factor bets on the phenomenon that stocks with low volatility earn greater risk-adjusted
returns than highly volatile assets.
How Do Equity Portfolios Earn?
Dividend income and capital growth are the two main ways that equity portfolios may make money.
When the value of the stocks in the portfolio rises over time, this is called capital appreciation. The
portfolio's value rises along with the price of the stocks, generating a profit when the equities are
sold. If the equities are kept for a year or more, this profit can be realized as a capital gain,
resulting in beneficial tax treatment.
Another source of income for equities investments is dividend income. A profitable business may pay
dividends to its shareholders in order to share some of the money with them. These dividends, typically
distributed quarterly, can give investors a steady source of income.
To increase returns, you may employ a variety of investment techniques, including growth investing,
value investing, and dividend investing. Also, have a good understanding of a company’s equity
valuation.
Who Should Invest?
Anyone looking to increase their wealth over the long term and with some extra money should consider
investing. You can achieve your financial objectives more quickly by investing than by merely saving
because it allows you to make a return on your money via the power of compounding.
Nevertheless, investing has risks, so you must clearly understand your financial situation, risk
appetite, and investment goals before making a purchase. Additionally, if you don't know where to begin,
do your research and ask a financial expert for guidance.
Here are some benefits you will get when investing in equities:
Potential for High Returns: Equities have higher returns than most asset classes. While there is no
guarantee of future returns, investing in equities can give you the potential for significant wealth
creation over time.
Diversification: Investing in equities can help diversify an investment portfolio, reducing overall
risk.When you invest in variety of stocks across different sectors and geographies, you can spread your
risk and reduce the impact of any one company or sector's performance on their overall portfolio.
Ownership: By purchasing shares of a company, you get a portion of its ownership. This may increase your
participation and sense of pride in the business while also giving your the chance to cast votes on
crucial topics at yearly shareholder meetings.
Liquidity: Equities are highly liquid, which means you can buy and sell a stock anytime in the stock
market. This makes it simple to modify your portfolios as necessary and rapidly access your money
whenever you want.
Types of Equity Investments
Common shares:
Common shares are the most common type of equity investment; when you buy a company's equity (a.k.a
shares), you become part owner of the company (called shareholder). You may purchase these equities from
NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). You can make profits as a company grows.
Although investing in shares carries a high risk, it also has significant potential returns.
Equity Mutual Fund Investments
In Equity Mutual Fund Investments, a group of people invests their money together to buy shares in many
different companies. A fund manager then manages investors' money and further invests in shares, bonds,
etc. Therefore, Investing in mutual funds is a good option for people with little trading experience and
free time.
Based on market size, equity mutual funds can be categorized as large, mid, and small. Mutual funds have
lower risk than other investment options. Also, you can invest in mutual funds one-time or through SIPs
(Systematic Investment Plans) from various apps like Zerodha, Groww, etc.
Equity futures
Equity futures are basically contracts that allow you to buy or sell company shares at a specific price
AND time in the future. They generally have a limited duration of 3 months. The last Thursday of the
third month is often the settlement day for equity futures.
Arbitrage funds
Arbitrage refers to simultaneously buying and selling the same stock on multiple exchanges to benefit
from price difference opportunities.
Preferred share:
A preferred share is like a common share, but you can get dividends annually. Also, it comes with a
benefit like you will be get paid first if the company goes bankrupt.
Private Equity fund
A private equity fund is a specific kind of investment fund that raises money from institutional
investors or high-net-worth individuals to invest in privately owned businesses.
A limited number of people often own private companies, do not have their shares listed on stock
exchanges, and are not accessible to ordinary investors. Private equity funds invest in these privately
held businesses to create profits through capital appreciation or operational improvements.
Alternative Investment Funds
Investments made through alternative investment funds are made in assets other than stocks and bonds,
such as real estate or small businesses. Unlike stocks or bonds, which are made up of several pools of
investment funds that invest largely in hedge funds, venture capital, managed futures, private equity,
etc., These investments are less common or easy to buy than stocks or bonds.
What is equity analysis, and why is it important in the world of finance?
Equity analysis assesses a company's financial and operational performance to determine the stock's
worth. This research examines the company's financial accounts, including its income statement, balance
sheet, statement of shareholder's equity and cash flow statement, to comprehend its profitability,
revenue growth, debt levels, and other economic parameters.
In addition, management quality, industry competitiveness, and growth potential are all considered part
of the equity research process. To assess a company's competitive position, stock analysts may view its
market share, product offers, pricing policy, and clientele.
Equity research aims to ascertain the genuine market value of a company's shares based on its
operational and financial performance and its potential for future growth. This can help investors
decide whether to buy, hold, or sell a stock based on its current price relative to its intrinsic value.
Why is Equity analysis important?
Since many factors directly affect equity markets and hence affect the stock price. As a result, doing
equity research to gain more profound knowledge can help you better grasp equity market swings and
progress toward your financial goals. Therefore, equity research is of utmost importance for an
investor.
It helps you make informed investment decisions.
It is also essential for equity portfolio management and allows you mindfully diversify your portfolio.
It also helps companies improve their performance and increase profitability.
Introduction video.
