How Equity should be a preferred Asset Class for Middle Class?

How  Equity  should be a preferred Asset Class for Middle Class?

Equity as an asset class is the youngest among all the available opportunity in the Indian Financial System.  Debt or Fixed Income Security, Real estate, Gold all have been long explored and practised as the major source of wealth creation since generations, and therefore our understanding of same are certainly much better than Equity. But ironically despite attached risk and volatility, Equity is fasted emerging asset class both in term of exposure and opportunity. And therefore it is necessary that we learn the basics of Equity investment.

Equity is rightly explained in terms of Ownership in any entrepreneurship. An Owner shoulders the burden of risk and hence deserves to corner the reward as well. Therefore the Risk and Reward are the attached attribute of equity. The Valuation of Equity is ordinarily explained in terms of Index movement popular are BSE – 30 and Nifty-50.  The Index represent few selected stock based on certain parameters.  For example BSE coined in 1979 at base of 100 for 30 stocks has now scaled up to 27500 while lurching between steep volatility and boring plateau. Conclusion is Stock Prices does not move in Linear straight line, rather they oscillate as its function of earning identified as Earning per Share – EPS, Return on Equity, Book Value, Dividend Yield.  Good Performance rewards its owner Poor performance mess up your capital even.  So while we invest in Equity both directly or through Portfolio of Mutual Fund, Must look at the EPS of underlying and compare them among the Peers.  

The next important is to understand the valuation mechanism in the Stock market. A Company`s equity or Portfolio can be valued differently at different time period depending on demand and supply  in the market along the line of its intrinsic Value also explained earlier as EPS.  The Market valuation is measured through the terminology called PE ratio, Price earnings Ratio. PE ration explain the strength of Market Price in multiple of its earning. A Low Price Earning Ration means a cheaper market and high Price Earnings ratio means a costlier Market.  Our understanding affirms when we buy cheap and sell costly we make Money or else we lose. While the understanding is brilliantly understood and executed in dealing with other asset class like gold, Real estate or debt, the opposite is practices in Equity Market. Yes ironically we buy when Index is High, when PE multiple is high When it is costly and Sell when Index is Low, PE multiple is Low and it is cheaper.

The result is always worrying past, a regrets and frustration. Why do we do this? We are prisoner of our biases and follow the dictation of Greed and Fear.  Discipline is said to be only remedy rather Panacea. Expert suggest follow Market closely but Invest regularly through SIP- Systematic Investment Plan in Mutual Fund.  This is the most scientific and disciplined way to approach Equity Market.

Equity since Inception say 1979 has earned over 17% return and that is tax free.  Wealth formation through this asset class is the easiest and natural corollary.  Must research and engage yourself with Equity.