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A stock is an actual share in the ownership of a business. If you buy a hundred shares of a company whose ownership is divided into one crore shares, then you are the owner of one in one lakh parts of the company. Such a share is tiny, so you don’t have any say in how the company is run, but you can gain financially from your ownership.
Investment Objectives and Risks
There are two ways to gain from your ownership of shares:
Capital gains: Profit made by selling a share at a higher
Dividends: Part of the company’s profit that is distributed by
the company.
Most investors have capital gains as their primary goal, with dividends playing only a supporting role. Stocks have the highest risk and the potential to earn the highest returns among all the investment products featured in this book.
Stocks or Mutual Funds?
For most investors, investing in equity mutual funds is a better way of getting the gains of stock investing with lower risk and less hard work. However mutual funds do carry fees and are subject to certain constraints. Thus, sophisticated investors who are willing to devote a reasonable amount of time to analysing and evaluating stocks may find stock investing more suitable.
Investing vs Trading
Stock investing encompasses two very different kinds of activity. One consists of identifying fundamentally sound companies and investing in them for the long term. The other consists of identifying trends in stock prices and trading in them for short periods in the hope of turning a large and quick profit. The period may be as short as a few days or even hours. The first is called ‘investing’; and the second, ‘trading’ or ‘speculating’. Trading is a high-involvement activity that generally carries high risk.
Capital Protection & Inflation Protection
There is no capital protection while investing in stocks. There is no guaranteed inflation protection with stock investing. However, over the long term, stocks are capable of beating inflation better than any other investment product.
Guarantees
There are no guarantees in stock investments. Stocks and Equity
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Stocks and Equity
Liquidity
Generally speaking, stocks are extremely liquid investments. There’s no lock-in of any kind. You can sell your investment at any time and realise your money within three days or less. However, the ability to sell your stocks depends on someone else’s willingness to buy them. This is rarely problematic for the 200–300 largest companies. However, for smaller companies, selling your stock may take time.
Where and How to Invest
All stock trading must be routed through a stockbroker. The actual trading is done through a stock exchange, of which the stockbroker is a member. For all practical purposes, there are only two stock exchanges in India, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Both have computerised systems and all trading is computerised.
One basic prerequisite for trading in stocks is to have a depository account (DEMAT). This is like a bank account which, instead of money, holds your shares. There are two depositories in India, National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). Your stock broker will facilitate the setting up of your depository account.
Opening an account with a depository involves going through the ‘know your customer’ (KYC) process, much like other financial transactions. You will need the following documents for KYC: proof of identity (PAN card copy, copy of the passport, driving licence, etc.) and proof of address (Aadhaar card, voter’s ID card, etc.)
How to Exit Stocks
Selling a stock is also a transaction to be executed through your stockbroker. After your stock is sold, you will get the money credited to your bank account two business days after the transaction.
Stocks and Equity
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Choosing a Stockbroker
Choosing a stockbroker is an important decision. Stockbrokers range from large online services like ICICIdirect, Edelweiss and HDFC Securities to smaller outfits that serve customers in a more personalised manner. For a small investor, an online service might make more sense. Besides carrying out the actual transaction, a stockbroker may also give you investment advice. However, the quality of this advice tends to be highly variable and it is for you to judge its actual utility.
Taxation
z Dividends earned from the stocks in a year are not taxable
up to `10 lakh. Dividends above `10 lakh have now been made taxable at the rate of 10 per cent.
z Capital gains are taxed at 15 per cent if you sell a stock
after holding it for less than a year. There is no tax if you sell a stock after holding it for more than a year
z A 0.1 per cent tax called STT is imposed on the value of
each stock in case of delivery of shares (whether buying or selling). In case of intraday transactions, 0.025 per cent tax is charged at the time of selling only. You don’t have to get involved in paying the STT as it is deducted by your stockbroker.
POINTS TO REMEMBER
zStocks are ownership shares in companies.
zThey have no capital or interest guarantees but their
returns carry the potential to beat inflation over the long run.
zHolding stocks for periods exceeding 12 months