Evolution of equity based investments

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The equity market is all abuzz with investors today. The sheer variety among the types of equity investments in India gives risk-friendly investors several reasons to rejoice. From direct equity to different kinds of equity-based mutual funds, there is no dearth of choice.

But surely, it was not always like this. Equity investments, like almost everything else, definitely had very humble beginnings. It has taken decades for equity and equity based investments to reach the level of diversification we have today. Curious about the evolution of equity investments in India and the world, in general?

Let’s take a quick trip back in time and find out more.

Equity investments before the birth of equity

There’s a running punchline about how the world’s first stock markets - credited to have cropped up in Antwerp, Belgium - didn’t actually trade any stocks. That’s definitely true, because the markets in Antwerp had all the infrastructure that resembled today’s stock markets. But instead of trading in equity, the buyers and sellers in the Antwerp markets traded in other financial instruments - primarily, bonds.

The world’s first publicly traded company

The very first ‘proper’ equity investments can be traced back to The Dutch East India Company. Interestingly, the driving factor behind these equity trades was simple and unanimous. It was risk that drove investors to buy equity in the company.

Trades in those times primarily occurred over sea routes. And sometimes, ships carrying goods and treasures never made it back to the shores of the home country due to stormy seas or pirates. Investors then started to see how risky it was to put all their money on just one voyage. So, they started to diversify in order to minimize the risk.

Eventually, The Dutch East India Company came up with a simple solution for investors. Shares in the company were put up for sale on the Amsterdam Stock Exchange. That way, investors could fund the voyages with their investments. And any profits that the company made found its way back to the investors. There was no more need to bet on which ships would make it back home safely.

 

The stock market bubble in the 1800s

Equity based investments may have been born with The Dutch East India Company’s listing, but it was only in the 1800s that investors woke up to the potential that the stock market held. The London Stock Exchange was created in 1801, and with it came the stock market fever. Unfortunately, highly unregulated trading meant that the mix of companies on the exchange had both legitimate and illegitimate players.

Things went south quickly, and when many companies failed to pay out dividends, the London Stock Exchange was forced to acknowledge that the first stock market bubble had officially burst. Consequently, trading was highly limited thereafter, up until 1825.

In the meantime, the New York Stock Exchange (NYSE) was created in 1817. And it took over the void left by the London Stock Exchange ban. Over the years, the NYSE has grown from strength to strength, and has retained its position as the top stock exchange in the world.

Equity investments in India

The latter half of the 1800s was also a great time for the Indian financial markets, because the year 1875 saw the birth of the Bombay Stock Exchange (BSE). It wasn not only India’s first stock exchange - it was Asia’s too. Over the years, the BSE has stood strong and resilient, braving all financial developments and keeping pace with the times. Today, along with India’s largest stock exchange - the NSE - it is among the top two exchanges in India.

Beyond the bare minimum:  The types of equity investment available

Direct equity was the foundation of equity investing across the world. Today, even that category has evolved to include different types of direct equity, such as:

  • Large-cap stocks
  • Mid-cap stocks
  • Small-cap stocks
  • Blue chip stocks
  • Penny stocks

And moving beyond direct equity, there are equity-oriented mutual funds too. These are essentially investments that pool together money from different investors, and then invest that money in various equity instruments. Based on the kind of equity they invest in, equity mutual funds can be of the following types.

  • Thematic equity funds
  • Sectoral equity funds
  • Large/mid/small cap funds
  • Multi cap funds
  • Active funds
  • Passive funds
  • ELSS funds

Wrapping up

See how equity investments have evolved so much over time? From merely being traded on the exchange for the sake of reducing risks, to evolving into different categories, each with their own investment objectives, the equity market has grown by leaps and bounds over the past few decades.

A quick recap

  • The Dutch East India Company was the first company that was publicly traded.
  • Equity in the company was available to buy and sell, since it was listed on the Amsterdam Stock Exchange.
  • In the 1800s, other exchanges like the London Stock Exchange, the NYSE and our very own BSE were created.
  • Today, in addition to direct equity, we have other kinds of equity investments like a wide range of equity-oriented mutual funds.

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FAQ'S

Yes. To invest in equity stocks, you will need to have a demat account and a trading account. This will, in turn, need to be linked to your bank account.
Records show that since the NSE’S incorporation in 1992, the average stock market return for the NSE is around 17%. However, a more conservative estimate would be what the Goldman Sachs’ data shows. According to this data, over the course of the last 140, the average rate of return for any 10-year period has been around 10%.
If you are planning to invest for the long term, fundamental analysis can help you identify the stocks with greater long-term potential. On the other hand, if you are going to trade in equity stocks, technical analysis becomes more relevant.
An equity investment is money that is invested in a company by purchasing the shares of that company in the stock market. These shares are typically traded on a stock exchange.
Most equity investors invest in equities because they expect that the share price will rise, thereby giving them capital gains. Equity investments also generate returns in the form of capital dividends. Equities also help you diversify your investment portfolio and strengthen your asset allocation.
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