STOCKS - RISKY , BUT REWARDING
PLAN YOUR INVESTMENTS IN STOCKS
MANAGE PROFITABLY
BASICS OF STOCK MARKET INVESTMENT IN INDIA
SOME BASIC FACTS ABOUT STOCKS
1.The stock of a corporation constitutes the equity stake of its owners. It represents the residual assets of the company that would be due to stockholders after discharge of all claims on the corporation . . Stockholders' equity cannot be withdrawn from the company in normal course .
2. Stocks of a company are divided in to shares . Shares can be divided into two categories - equity and preference shares. Equity shares holders have the power to share the earnings/profits in the company and a vote in the AGMs of the company. Preference shares holders earn only fixed dividends and have no voting rights. Equity shareholders are regarded as the real owners of the company.The shares are offered for sale directly by the company for the first time in the primary market and the trading of shares takes place in the secondary market.
3. A shareholder of a company is one of the owners of the company along with all other shareholders .
4. A retail investor would hold a minuscule of the total shares of a company .
5. In fact funds collected from a retail investor who holds minority shares are handled by the promoters of the company who hold major proportion of the shares and who manage the company .
6. Money invested for purchase of a share by an investor can not be redeemed by the investor during the ordinary course of the company's existence and can be redeemed only by selling those shares in market .
7. A share holder is entitled to the dividend declared by the profit making company .
8. As funds are being handed over to the majority holders / managers of the company and as minority share holder has little say in management of the company , extreme diligence is required with regard to the standing , trust worthiness , capability of the promoters / managers of the company . An unscrupulous promoter can misuse the funds in spite of various checks and balances .
9. Even when funds are utilized for the genuine business of the company by promoters , the investment carries all the risks of the business and there is no guarantee of the success .
10. All the money invested in a share can be lost by liquidation of the company and company carrying more losses than the investment .
11. Hence an investor should be ready to bear the risk of loss of entire investment while investing in a share and Investment is shares is regarded as HIGH RISK category investment
12. If company makes good profits & grows , the value of shares will also grow and a shareholder reaps the benefit of profit and growth .
13. Shareholders are entitled to the portion of profit declared as dividend and distributed periodically .
14. The profits derived from investment in shares can be unlimited in a successful business. As company grows , investment value also grows .
15. Shareholders can sell their shares through stock market at a price determined by the market . Market prices keep on changing depending up on the demand and supply of shares in the market and may not reflect the actual value of the shares as seen in the books of the company .
16 . The new buyer will step in to the shoes of the seller and he will carry all the rights of the shares against the price paid by him for purchase .
13. In nutshell,
a. Investor is shares owns a part of the business which is manged by promoters / managers .
b. Shares can be purchased at initial offering from the promoters or in a secondary market through stock exchanges
c. the success of business depends up on the capability of the managers to do the business profitably
d. the company may share a portion of profit it makes as dividend periodically
e. Investor can redeem his investment by selling at a price offered by a buyer through stock market .
Lure of unlimited profit in stock investment brings the investors in to the stock market .
There are two stock exchanges in India through whom most of stock trading take place . They are National Stock Exchange of India ( Website ) http://www.nseindia.com/ and Bombay Stock Exchange India Ltd ( Web Site ) http://www.bseindia.com/ .
Trading Mechanism in stock exchanges
All most all companies who have issued shares to the public are listed in either or both of the stock exchanges and the shares held by the investors are kept in a computer system in a Demat way with Depository agencies . There are two Demat depositirs in India viz National Securities Depository Limited (NSDL) and Central Depository Service (India) Limited (CDSL) . Buyers and sellers of shares give order to stock exchanges through their brokers which will be forwarded to the trading computers . Trading at both the exchanges takes place through an open electronic limit order book, in which order matching is done by the trading computer. The market orders placed by investors are automatically matched with the best limit orders. As a result, buyers and sellers remain anonymous as there is no human intervention . The exchange of funds and shares take place through clearing houses where settlement of shares and funds take place
Accounts needed to invest in shares :
A prospective investor in shares requires the following three accounts to invest in shares
1. Savings Bank account with a Bank to deposit funds for purchasing shares .
2. Demat account with a Depository Participant ( DP ) to deposit held shares and withdraw
3. Trading account with a broker for buying and selling of shares .
An investor gives order to the broker for purchase of shares at a specified price on his account . If the order gets executed, purchase price will be removed , on the settlement day , from investor's account with the bank and shares purchased will be credited to the demat account of the investor with the DP .
An investor has to hold three accounts one with broker , another with DP and third with banker . As giving orders to three different entities are cumbersome for an investors , there are banks which offer all the three services so that transfer from one account to another is seamless
Risks and Rewards of Investing in Shares :
As earlier mentioned , Risks of an investing in shares is losing of all the money invested while rewards are also unlimited . It is a high risk investment as entire money invested can be lost . It is like being a sleeping partner in partnership where business is managed by active partner and sleeping partner's gains depend up on the ability of active partners to generate profit . Only difference is sleeping partner has unlimited liability in a partnership while share holder's liability is limited to shares bought and money invested .
In spite of such a a risk , investors are attracted to Share market , firstly because of their greed to make more money and secondly lured by the history of the market where many investors have gained with their prudent investments . While risk is a possibility of loss , history of the market shows better yield on share investment than many other modes of investments .
Before investing in shares , one has to study his own financial position , loss bearing ability and the greed he has for the money . A prudent investor will invest only that much funds which he is comfortable to invest in a risky venture . he will allocate such a portion of his investable surplus which will not make him lose his good night sleep. Further he diversifies his investment in shares to various sectors and sub-sectors of economy so that his risk is not concentrated .
PRECAUTIONS WHILE INVESTING :
One has to be careful while investing in share market as the underlying securities come under HIGH RISK category .
For the article on precautions one has to take while investing CLICK HERE
Trading v/s Investment :
Even some experienced investors get confused over trading and investing in shares . While traders hold their position for short period , investors hold for their positions a longer period . Of course both take positions to earn profit . Basic difference is the traders take position based on their study of market price movement while investors take positions on the fundamental values of the shares . While study of movement of prices is called Technical analysis , study of value of shares is called Fundamental analysis . As market price moves swiftly during trading sessions , a trader has to continuously monitor his position and decide when to come out . An investor whose position is based on the study of fundamentals of the company and fundamentals change most of the time gradually and over a period . Hence investor need not worry about daily , hourly movement of the market prices . However he has to monitor the financial position of the company on a regular basis to decide when he has to come out . A person who can not devote all his time to the market has to refrain from trading .
TAX IMPLICATIONS ON STOCK INVESTMENT :
Investment in stocks are exempt from Income tax if the stocks are held for more than one year considered Long Term Capital Gain and if total gain in less than Rs 1.00 lakh in the financial year . LTCG above Rs 1.00 lakh in a year carry LTCG Tax of currently 10 % . Dividends received on Equities are to Tax free . However If stocks held are disposed off within one year of its acquisition , then profit earned on sale will be reckoned for income tax . It should be included under the head " CAPITAL GAINS " in the Income tax return . Any capitol loss on equities can be carried over for 8 years .
INVESTMENT ADVISORS :
As a new investor , one requires some advise from the knowledgables and gurus in the absence of personal experience . Each one of the advisors will have his own favorites and he/ she would dish out few selections for action . However it will be prudent for the investor to independently study the company , its promoters , their track record , financial position of the company and the business of the company and be satisfied before investing . In fact it would be better to study various opinions available in the media on the stock and decide for himself to invest what percentage of excess fund reserved for stock investment in to this stock . One can make a short list of " his would be investing shares " for final selection . Investment can be done gradually over the period waiting for the dips to improve the buying cost . One should be careful about the advisors who have personal vested interest in making you to buy a particular stock .
One can think of investing in equity mutual funds before actually start investing in individual shares , as that will give glimpse of how the market movement affects our investment . Equity mutual funds are managed by professionals and would be more diversified than investing in individual stock . However risk level continues to be High Only .