Monday, December 9, 2013

Equity ? What is it ?

Equity ? What is it ?
Equity = Ownership = Partnership = Investment in Business
To make it simple, Equity Means doing Business or Investing in a Particular Business and earning profit from it.
When you start a new business, think of an idea & start implementing the same, risk is always there on the performance of business, the probability that business will prosper or not ? You invest some amount & expect some returns over a period of 5-10-15 years. Now you are a share holder / owner of business / partner in business.
People talking about building empires & diversifying across the countries, requires capital. And when you put money into business, doesn’t necessary mean it will prosper, or do well. And when you do not have too much of capital, you offer partnership to someone who is going to be partnering you in business with money. It means you Share.
The underline says that when you put your money into business, start investing in the same, earn profit or incurred loss on the same, actually creates the value in business and it reflects in overall wealth or in shares. The profit reflects in balance sheet / business and as a % of share holding, it is then transferred into the hands of Partner / owner / Share Holder. So whenever companies make profits, it reflects in Share Price of that particular business.
But when you make profits, it does not mean it will reflect in share price on the same day. Like, we have seen companies making huge profits since 3-5 years and stock prices almost are the same, it means there are certain other factors which also affect the share prices; like business expenses / debt taken by companies, impact of economic reforms, market valuations etc., etc., In a situation where prices of stock remains the same & profit of companies are growing at certain % year on year basis, it means market will adjust the stock prices according to the profit earn by particular stock / share / company / business. The same way if company is making losses, it will reflect on the negative side and adjust the share price accordingly.

So remember, when you buy a company / stock, it takes time to grow, not necessary that it will start generating profit & cash flow from next day, as it is a lengthy procedure, like investing money, buying land, building, machinery, recruiting staff, production, packing, transit, marketing and selling or branding of the product. It’s like growing a babie, baby do not start walking in a day or two rights? It takes time to earn profit out of business.