Summary:
In the stock market, equity delivery refers to the transaction through which an investor buys or sells stocks to take or give the actual custody of the shares. It is a strategy that is used to generate wealth in the long term. This blog has the details.
Introduction to equity delivery
In the stock market, equity delivery is a type of investment and trading transaction. Here, 'equity' means the ownership of stocks or shares of a company. During equity delivery trading, an investor buys or sells stocks to take or give the actual custody of the shares.
How equity delivery works:
- Purchasing shares: When a trader wants to invest in a firm's stock via equity delivery, an order is placed to purchase a fixed number of shares at a specific price. Upon the execution of the buy order, the investor becomes the owner of the shares. They are credited to the demat account (which means dematerialised) account. The shares are electronically held and grant the investor certain benefits and rights. These may include receiving dividends and voting rights.
- Selling shares: When an investor holds and owns a certain number of shares, they can sell them via equity delivery by placing a sell order. When the order to sell is executed, the buyer receives ownership of the shares. They then get debited from the demat account of the initial holder of the shares.
Usually, equity delivery trading is considered to be an investment strategy that is undertaken for the long term. This is because traders purchase the stocks hoping for an appreciation in their value so that they can profit from it by selling them later. This is how it differs from intraday trading, where investors purchase and sell stocks on the same day, hoping to earn profits from swift and short-term price fluctuations.
Benefits of equity delivery
Investors who choose to have long-term investment strategies by using the buy-and-hold approach use equity delivery. The following are a few of the main advantages of equity delivery:
- Ownership of company shares: Through equity delivery trading, investors become actual shareholders of the company. This implies that they have ownership rights. These may include receiving dividends and voting rights at shareholders' meetings. The main advantage however is that traders get returns from the long-term success and growth of the company.
- Wealth creation in the long run: Traders who choose to stay invested in the long term opt for equity delivery to create wealth. This is usually for extended periods of time. Historically, the potential for returns from the stock market has been seen to be better in the long term.
- Diversification: By investing in different stocks across various industries, traders are able to diversify their portfolios. Through equity delivery, they are to build diversified portfolios of stocks, which helps to reduce the risks associated with holding a position that is concentrated on a single sector or company.
- Dividend income: Some organisations pay dividends regularly to their shareholders. Investors who hold their stocks via equity delivery are able to earn in the form of dividends. This is extremely valuable for investors who have strategies that are income oriented.
- Flexibility: Through equity delivery trading, traders and investors have flexibility with regard to the time horizon of their holdings. They are able to remain invested for as long as they like. They do not have to worry about the daily fluctuations in price, which is a risk in intraday trading.
- Reduced stress: In comparison to trading strategies which are geared towards the short run (swing trading or day trading), equity delivery is usually less stressful. Investors need not constantly monitor the market constantly or make adjustments based on short-term price movements.
- Investment in strong fundamentals: Through equity delivery, investors are encouraged to concentrate on the fundamentals of companies. This includes growth prospects, financial health and competitive position. This results in more rational and informed investment decisions.
- Compound growth: Reinvesting dividends and letting the investments compound over time significantly boost overall returns from equity delivery investing.
- No requirement for margin: In contrast to margin trading, where the investor has to borrow funds to purchase stocks, equity delivery does not have any margin requirements. This significantly reduces the risks associated with leverage.
Summing up
Trading through equity delivery is usually perceived to be a relatively straightforward and safe means of investing in the shares, especially when seen in comparison to more speculative and short-term trading strategies such as options trading and day trading. Investors who use this method are usually aware that there is still an element of risk, just like any other form of investment.
To play it safe, diversification and the implementation of a solid investment strategy help ensure the mitigation of risks of equity delivery trading. Investors need to stay informed about developments in the market and review their portfolios at regular intervals so that their financial goals are achieved.
Conducting in-depth research before making an investment is done by studying companies' competitive position, financial health and growth prospects. Through informed decision-making, risks can be reduced and equity delivery can be used to generate wealth and income in the long run.