For a simple definition, equities mean shares in the ownership of a company, i.e. When a company issue shares it offers partial ownership in the company, whereas when it issues bonds, it is borrowing money from the public. Value of the equity owner increases when the share is worth more than what they paid for them. Another way is when a company pay dividends out their profits. For an investor, it is important to understand between the two! A capital gain is a difference of the price rise from when one has bought the share and dividends are the payments made by the company as a part of profit.
Types of Equities:
Types of equities differs on the basis- if the business is an organisation or a partnership. Below mentioned are some of the types of equities:
- Preferred Stock: Investors holding preferred stock have higher access to earnings and assets of the company and are more likely to get regular dividends as they tend to have a priority over the common shareholders. Preferred stakeholders generally have fixed dividends and may suffer the loss of higher dividends in case of elevated profits.
- Common Stock: These are the portion of company’s ownership which allow the shareholders to vote on corporate issues and act as an asset for the stakeholders. These are at the bottom of priority ladder in terms of pay out if in case the company goes bankrupt. This makes it riskier than the bonds and preferred equity.
There are certain tips which are essential for an investor to keep in mind which will help them to keep perspective during turbulent periods:
- Objective decision taking: It is rightly said that it is not necessary that someone with high knowledge of investment market is the only one who accomplishes success. It is not highly correlated with the knowledge somehow. Sometimes, over activity during the difficult times creates panic in the market and investors tends to harm their portfolio returns.
- Plan ahead of alarming occasions: It is essential for an investor to know the worth of the stock to decide on why and when to buy the same. During the times, when a person is clear of its investment appetite, it is important to make a list as to why a stock is worthy, its future expectations, metrics and milestones achieved, potential pitfalls, which will justify its trading in the bad times. No wonder there are reasons to split up the stock, but it is important to know what has derived the downfall, is it only the price or the fundamental changes which has affected the ability of the company.
- Building up gradually: Time is one superpower which can be rewarding as well as unfulfilling. This means it is important to invest time in trading and building the portfolio gradually after knowing its returns, dividends and price volatility.
- Avoiding Overactivity: It is hard to keep a constant eye on the stock as there are results coming every now and then. This can result in overactivity and can tumble the prices of the stock in no time. As mentioned above, when there is price volatility check the reason of such activity before taking an action, know if there is any collateral damage or is there something which has changed in the underlying business.
- Picking up companies not stocks: It is important to know the revenue model and the business a company is doing, rather than just investing in stocks because it is giving good returns. Bear in mind that buying a stock makes an investor a partial owner of the business and somewhere it affects them as to how the company operates.
Therefore, a rational voice can serve as a guide for laying out a plan during the unavoidable ups and downs that come with investing in stocks.
Most of the companies provide retirement benefits for the employees like gratuity, pension, provident fund etc. either due to statutory mandate or to retain employees for a longer period. Superannuation benefit is one such benefit, which is not well-known by many employees and hence tend to overlook it. Given this, it is important to understand the nature and what benefits these funds offer for better financial and retirement planning.
Under a superannuation fund, organisations either manage its own fund or open their own trusts and contributes a fixed percentage of an employee’s salary in the fund. Employee also transfer the same percentage or more in case of defined contribution plans.
Superannuation benefits can be classified into two:
- Defined Benefit Plans: These are the pre-determined benefits offered by a firm taking on account various assumptions like the number of years an employee spend in an organisation, his salary, no. of years of a person’s life. Taking on account, these assumptions, an eligible employee receives fixed amount derived out of a formula at regular intervals.
- Defined Contribution Plan: Unlike the benefit plan, defined contribution plan levers the risk on employees and contributes a fixed amount into a fund without worrying about its future returns. Hence, employee doesn’t know what amount he will receive in future.
One of the biggest fallacies about a superannuation is that people thinks it’s an investment when it is not. It’s a legal trust which holds investments. The main asset classes super funds can invest in are shares, real estate, bonds and other fixed interest investments, private equity, infrastructure and alternative investments like hedge funds, currencies etc.
Below stated are some suggestions to get your superannuation fund back on path after a stock market plunge:
- The first and foremost tip during such situation is to maintain calm and not panic. It is important for investors to understand that economy is cyclical in nature, if it is facing a downturn, it will go up also. The key focus is not on everyday movement but to check if it is heading in the right direction.
- One can also try and change his/ her investment strategy. During retirement, falls are not easy to take, and investors usually have lesser time to recover. So, it is advisable to change the investment strategy depending upon the circumstances. Keeping some steady cash balance may turn as a good technique as one can make additional investments.
- Plunge in the market is not always bad, for some people it may bring some good news. It is important to have a clear view when to enter and exit a market.
- An investor may have a good knowledge of market but at an age of retirement, it is important to safeguard your future. If you are still worried about the downturn, you need to check whether the securities you have invested in matches your risk appetite. Seeking help of a financial advisor can help with a better understanding of risk and rewards.
While the economic downturn may be intimidating, it is important for an investor to keep an eye on a bigger picture and realise that it is not permanent.
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