What does it mean to invest in equity? For some it is quick gains in multiples, for others a sure loss of capital. While the outcomes can be either, equity investing is very different from gambling. It is about owning a portion of a profitable company and reaping benefits of this earnings growth as reflected in the changing stock price.
So… it’s not a gamble?
Equity investing is a calculated opinion on the future of a company. If the company’s earnings grow as per your (or your fund manager’s) calculations, you stand to gain. If on the other hand the company falters, gains in stock price won’t come through as expected. But how can you know, whether to hold on to your investment or sell? If you hold on and lose money – then what’s the difference between this and a long night of playing black jack in a casino?
The difference is the homework needed to pick a good quality company to invest in. It means you have to research the company, understand cashflows, profitability and the business’s future prospects before investing.
It’s like starting your own venture or investing more in an existing one. Not only does this require adequate time, but also an understanding of the business details.
What if you are not equipped to do this detailed research? That’s what qualified fund managers who look after equity mutual fund schemes are there for. If you don’t have the ability to filter and buy good quality companies, leave the job to professionals.
Equity investing becomes a gamble like a game of black jack, when you invest without understanding what you are buying. Just like in black jack, the outcome becomes a matter of probability – high gains or high losses, can be either.
It’s like starting your own venture or investing more in an existing one. Not only does this require adequate time, but also an understanding of the business details. What if you are not equipped to do this detailed research? That’s what qualified fund managers who look after equity mutual fund schemes are there for. If you don’t have the ability to filter and buy good quality companies, leave the job to professionals.
Staying invested compounds returns
What happens when a good quality company sees its stock price fall sharply? This can happen for several reasons, some common ones are, missing quarterly profit targets, leadership change, announcement of merger or takeover or any other relevant corporate action. In such cases, the collective wisdom of investors – better known as the market – perceives the change as good or bad.
If the perception is that earnings will be impacted negatively resulting in losses to the business, the stock price falls. Usually, the immediate stock price reaction is exaggerated – fall (or rise) is sharper than the eventual impact on earnings. For well-managed, long standing businesses, such events rarely result in a closure of operations and usually the company’s profitability bounces back in a quarter or two. What you need to do is analyse the situation and wait it out.
Once again, if you don’t have the ability to do this – then hand it over to professionals who manage equity funds.
Remaining invested to ride through the business cycles which impact company profitability is important. This means that returns will take years to multiply. Staying invested through long periods for gains is the second aspect that differentiates equity investing from gambling.
Done right, equity investing is not a gamble; follow tips and trade daily, then you are gambling. For investing rather than gambling, do your research or find a fund manager who does and remain invested.