An asset class is a collection of securities that exhibit comparable traits, perform similarly on the market, and are subject to the same rules and laws. There are many asset types, equity is one of them. We should understand that volatility in stocks is not the same as risk, but long-term wealth creation may be possible with equity as an asset type.
According to a recent study by Morgan Stanley, equity seems to provide the best long-term returns in India when compared to the likes of Gold, Mutual Funds, real estate or fixed deposits. It said that equity has delivered the best returns in India over 5-, 10-, 15- and 20-year periods.
Equity can be further divided into two main parts; Private and Public, the latter a concept which might be more commonly understood. ‘Private Equity’ simply denotes shares of ownership in companies that are not (or not yet) listed on a stock exchange. The term ‘Public Equity’ refers to shares of companies that already trade on a stock exchange. You gotta avoid panicking when markets get turbulent, which they occasionally do and remain composed and continue to accumulate equity holdings. Risk is typically understood to be the likelihood of a loss in any asset class. However, the risk is typically understood in the context of finance as the volatility of one asset class relative to another, such as fixed deposits vs equities. The unifying theme is therefore that the more volatile the market, the riskier the security.
Hence, understanding volatility to its core is very essential if we want to avoid any discrepancies in the perception of risk in equity as an asset class when it can offer some of the best returns.
Taking the example of one of the very old debates between investors, i.e. Stocks vs Real Estate, both tried and tested, the former being a rather new form of investment to the major audience than the latter but surely not something we humans don’t understand. Since old age markets have existed where you can buy and sell goods or have partial ownership of objects making the concept of buying or selling stocks an ancient ideology. One common argument by people who don’t wanna invest in the stock market and thus equity is that the short-term price movements make managing everything a tough task, even though the returns might be greater and multi-bagger. Although these days due to the rise of the fintech market we are greeted with more and more ways to invest in assets like stocks, crypto, digital gold, etc in addition also micromanage our investments making life much easier, the rules to investing in the equity and venture capital markets are way different, no matter how much the grass might seem greener on this side one shall preferably do their homework before getting into Private Equity Investing.
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