Equity is the asset class with inflation-beating and wealth-creating potential in the long run.
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 price than you bought it at.
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 from all the investment products featured in this book. Most of the other chapters in this book contain all the information that you may need to invest in them. That is not true for stocks. Stock investing is complex and what you read here is certainly not enough for you to start investing in stocks.
Investing vs Trading
Stock investing encompasses two very different kinds of activity. One consists of identifying fundamentally sound companies and investing in them for relatively 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 :
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.
There are no guarantees in stock investments.
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 never a problem for the 200–300 largest companies. However, for smaller companies, selling your stock may take time.
Credit Rating :
There is no official rating system for stocks.
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. 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 a day after the transaction.
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 an investment after holding it for more than a year z A 0.1 per cent tax is imposed on the value of each stock in case of delivery of shares (whether buying or selling). This is called the securities transaction tax (STT). 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 the stockbroker and paid to the government through the stock exchange.