Are you a beginner in the stock markets in India? Remember, it is not as complex as it is made out to be. Here is a quick primer on how to go about the stock markets if you are just starting out. For decades, Indian investors have preferred assets with a physical and tangible presence. Hence gold, land and property have been preferred investment options in India. However, it is stocks that can help you generate wealth over the long term. That shift is now evident with monthly equity fund SIPs crossing $1 billion on a consistent basis. Stocks need to be bought carefully, on the basis of professional advice and held for the long term. More importantly, these stocks need to be monitored regularly…
Understand the concept of share in a company
When you buy shares, you actually become a part owner of the company. For example if Company X has total of 1000 shares issued and outstanding and you own 1 share, then you are a 0.1% owner of the company. When you own a part of a company, you actually participate in the profits and losses of that company and the performance of that company gets reflected in the stock price. The stock price that you see in TV tickers and newspapers is just the reflection of the performance of the company. Your wealth grows as the stock begins to perform well in the markets.
Are there any distinct advantages of buying shares for me?
To begin with, you become part owner of the company and therefore it is the first step towards wealth creation. After all, it is the goal of every individual to create wealth for their families in the long run. Secondly, each year the company pays out dividends which are tax-free in the hands of the investors. There is no compulsion to pay dividends but good companies generally pay healthy dividends. Additionally, as the company performs, the stock price appreciates and this translates into profits for you. In short, this is the best bet for you to create wealth over the long run.
I want to buying and selling shares: how do I go about it?
Firstly open a trading account and a demat account with a broker. The trading account is required to buy and sell shares. The demat account is required to hold these shares in electronic form. Once you buy shares in the trading account they get credited to you demat account and when you sell shares they get debited to your demat account. A demat account is just like your bank account; only difference being that while bank account holds cash, demat account holds shares. All these 3 accounts can also be operated sitting in front of your PC or from your smart phone. It is as simple as that.
Is trading and investing one and the same?
They are different in terms of the time frame adopted. Trading is short term while investing is for the long term. A trader can close positions either during the same day or in a few days or weeks. An investor holds shares for many months or years depending on holding capacity.
Is there anything specific I need to remember as a trader in the stock market?
The trader should basically work to protect losses and ensure that capital does not get eroded. Traders should always trade with stop losses; meaning at some point the trader must take a loss and close the position instead of endangering capital. Traders also keep booking profits at regular intervals.
What points do I remember as an investor?
The first thing you need to remember as an investor is the need to think long term. You cannot make money in the stock markets in the short term. Secondly, stocks need to be researched and screened. Above all, don’t try and average your positions as that is not likely to benefit in the long run.
Can I end up with big losses in the stock market?
There are risks in trading in the stock markets. Unlike bonds and FDs, you do not have assured returns in equities. But that is the risk you have to take to earn higher returns. It is hard to create wealth in the long term through bonds and FDs. The good news is that these risks can be managed.
Are my profits on equities taxable?
Dividends received on the stocks owned by you are entirely tax-free in your hands. However, the recent budget has inserted a clause that if you earn more than Rs.1 million as dividends per year then you will have to pay tax on dividends at 10%. When you sell shares and make capital gains the question is whether these gains are short term or long term. Any sale of share within 1 year is short term capital gains and it will be taxed at 15%. Any sale of shares after 1 year is long term capital gains and it attracts tax at 10% above Rs.1 lakh per year. Losses can be set off.
These are some of the basics of equities. They can be helpful in starting off your journey in the equity markets.