Q What are Equities/shares?
Shares, stocks or equities are basically
one and the same thing. Buying a share in a company means buying a fraction of the
capital of a publically listed company. When an investor buys shares of a company,
he practically owns a part of the business of the company. Share prices tend to
fluctuate constantly in response to the company’s performance, market scenario and
economic environment. Investors buy shares in expectation of an increase in their
price in the future.
Q Where are Equities Traded?
In India, there are two primary exchanges;
the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).
Q Why should I Invest in Equities?
Shares or equities are an extremely popular
asset class for investors around the world. Equity markets have historically outperformed
every other type of investment and are generally held as an attractive way of creating
long term wealth by investing in shares of good companies. Share prices of a company
tend to increase following the consistent revenue and profit generation and investors
who had bought these shares earlier at a lower value tend to benefit as a result.
In addition to this capital gain, well performing companies also tend to give dividends
to the shareholders out of the profit they make.
Q How to Invest In Equities?
Investors can buy or sell shares through an
agent, commonly referred to as “stock broker”. Investors can simply open an account
with the broker and buy/sell shares in a publicly listed company which is listed
on any of the major stock exchanges in the country. Opening an account with a broker
is a straightforward process and it can be done quickly by submitting documents
like ID proof, resistance proof and bank details etc. Once an account is opened,
an investor can transfer funds according to his convenience and start transacting
in shares and other securities like commodities, equity derivatives etc.
Day Trading which is also referred to as intra-day
trading involves buying and selling of stocks within the same trading day or squaring-off
your trade on the same day. Stocks are purchased, not with an intention to invest,
but for the purpose of earning profits by harnessing the movement of stock indices.However,
intraday trading is riskier than investing in the regular stock market.
Q What is the difference between Primary Markets and Secondary Markets?
When a company comes out with an initial public
offer (IPO) it is called the primary market. The normal purpose of an IPO is to
list the stock in the share market. Once the share gets listed it starts trading
in the secondary market. The difference between the primary capital market and the
secondary capital market is that in the primary market, investors buy securities
directly from the company issuing them, while in the secondary market, investors’
trade securities already issued. In secondary market, an investor can buy shares
directly from a seller and the stock exchange or broker acts as an intermediary
between two parties.
Q What is Fundamental and Technical Analysis?
Fundamental analysis is about understanding
the business of the company, its growth prospects, its profitability, its debt etc.
Technical analysis focuses more on charts and patterns and tries to find out past
patterns to apply for the future. Fundamentals are used more by investors while
technicals are used more by traders.
A sector is a group of securities that share
similar characteristics, such as building materials, transport and engineering companies.
It is an area of the economy in which businesses share the same or a related product
or service. Dividing an economy into different sectors allows for more in-depth
analysis of the economy as a whole.
Q What Makes Stock Prices Go Up and Down?
If there are more sellers than buyers, stock
prices will tend to fall. Conversely, when there are more buyers than sellers, stock
prices tend to rise. However, there’s a compilation of factors that determine whether
stock prices rise or fall. These include the media, the opinions of well-known investors,
natural disasters, political and social unrest, risk, supply and demand, etc.
Companies distribute a small portion of a company's
earnings to its shareholders. This becomes an important source of earnings for investors
who stay involved in the share market for a longer period of time. However, the
size of this dividend is not known to investors as it depends on company profits
and is at the discretion of the company's directors. Companies can either pay fixed
rate, referred to as preferred dividends, or they can pay variable dividends based
on the earnings, known as common dividends.
Q What is the role of a Broker in the Share Market?
The broker helps you execute buy and sell trades.
Brokers typically help buyers find sellers and sellers find buyers. Most brokers
will also advise on what stocks to buy, what stocks to sell and how to invest money
in share markets for beginners. They will also assist in how to trade in stock market.
For that service, the broker is paid brokerage.
The full-form of DEMAT A/C is dematerialization
account. It’s an account where your bought shares will be deposited in electronic
format like how your money is kept in your savings account as electronic format
after deposit. There is a term called DP(depository participant) who has a right
to open up demat accounts & most of the brokers have got this DP license to open
up a demat account for you.
Q What are the charges applicable on Stock Trading?
Statutory charges like GST, stamp duty and
STT are imposed by either the central or the state government. The broker does not
get these payments. The broker just collects these on your behalf and deposits it
with the government.
SEBI refers to Securities and Exchange Board
of India. Because the bourses (stock market) have inherent risks, a market regulator
is required. The SEBI is provided with this power and has the responsibility of
developing as well as regulating the markets. The basic objectives include protecting
investor interest, developing the share market, and regulating it’s working.
Q How does Equity Market work?
ABC Limited is a privately owned company that
is currently worth Rs10,000,000. The owners want to raise some money so that they
can expand the business overseas. To do this, they sell a portion of the business
by issuing stock at Rs2 per share. This means ABC becomes publically listed. You
decide it looks like shrewd investment so you buy Rs10,000 worth of stock. At Rs2
per share that gives you 5000 shares, or a 0.1% stake in the company.Your investment
turns out to be a good one. By the time ABC releases its first annual earnings report,
its share price has risen to Rs3 and your investment has grown to a value of Rs15,000.
You can now either sell your shares, or hold onto them in the hope of future profits.However,
share prices can go down as well as up and if ABC plc had gone down in value you
could have lost money. For that reason, it is incredibly important to research both
the company you are thinking of investing in and their wider industry before you
buy any shares.
Q What are the risks involved in Equity Trading?
Since equities don’t pay a fixed interest rate,
they don’t offer guaranteed income. Hence, with equities comes the risk factor.
There are various risks involved in equity investment that affects your returns
such as changes in economic environment namely, changes in interest rates, inflation,
market risks to name a few. While investment in equities is not risk-free because
of various risk factors, being regulated by Securities and Exchange Board of India
(SEBI) you can be sure that there is no counterparty risk.
Q How can an Investor manage risk efficiently?
As an age old saying goes,'not putting all
eggs in one basket’, your equity portfolio should not be concentrated to one particular
investment style or a particular sector. Most risks associated with investments
in shares can be reduced by using the tool of diversification. To reduce the risk,
diversify your portfolio pyramid and make sure that your portfolio consists of shares
across various sectors and industries like automotive, engineering, financial services,
information technology. Also make sure the companies are all located in different
regions and that the companies you have invested in belong to large-cap, mid-cap
and small-cap clan.
Q How to build a Portfolio of Stocks?
A portfolio is a grouping of financial assets
such as stocks, bonds and cash equivalents, as well as their funds counterparts,
including mutual, exchange-traded and closed funds. Portfolios are mostly held directly
by investors and/or managed by financial professionals. The first step towards building
a portfolio is to have a clear goal. Once you have that, then it's relatively easy
to build the rest of the portfolio in a way that's suitable for meeting your goals.
Secondly, a focused and disciplined approach with limited number of stocks can help
improve performance of the portfolio. Thirdly, diversifying your investment portfolio
can help by spreading around your money to a number of stocks.A well-diversified
portfolio is important because in the event that one or more sectors of the economy
start to decline, it will remain strong over time and reduce the likelihood of taking
a significant hit as the market fluctuates.
Q What is Economic Environment?
The economic environment refers to the state
of the economy in a country or region. Economic conditions are considered to be
sound or positive when an economy is expanding and are considered to be adverse
or negative when an economy is contracting. Economic indicators which can be used
to define the state of the economy or economic conditions are the unemployment rate,
levels of current account and budget surpluses or deficits, GDP growth rates, and
inflation rates. An improvement in economic conditions would lead investors to be
more optimistic about the future and potentially invest more as they expect positive
returns. The opposite could be true if economic conditions worsen.
Q What are Company Earnings?
A Company’s Earnings is an official public
statement of a company's profitability during a specific period, which is usually
defined as a quarter (three calendar months) or a year. It is often evaluated in
terms of earnings per share (EPS) - this is the most important indicator of a company's
financial health. When the company has been profitable leading up to the announcement,
their share price will usually increase after the information is released.
Q What are PE ratios and how they impact investing decisions?
The price to earning ratio (P/E Ratio) is a
valuation ratio of a company’s current share price compared to its per-share earnings.
P/E is one of the most important and interesting ratios used to compare the price
and value of a particular stock. Usually higher the P/E ratio, the more premium
is the stock and vice versa. A high P/E ratio doesn’t necessarily mean that a stock
is expensive and should be sold. It simply means that investors are willing to pay
a premium to hold the stock.
Q What is Dividend Yield?
The dividend yield is a financial ratio that
measures the amount of cash dividends distributed to common shareholders relative
to the market value per share. Dividend yield is the relation between a stock's
annual dividend payout and its current stock price.A security's dividend yield can
also be a sign of the stability of a company and often supports a firm's share price.
Normally, only profitable companies pay out dividends. Therefore, investors often
view companies that have paid out significant dividends for an extended period of
time as "safer" investments.
Q What is the Tax treatment for Equity Investing?
Service Tax (ST) and Swachh Bharat Cess (SBC)
- Service Tax (ST) @14% and Swachh Bharat Cess (SBC) @0.50% are payable as a percentage
of brokerage due to the broker. ST and SBC together are presently levied at the
rate of 14.50%. This is payable to the government by the broker. Capital Gains Tax
– The Union Budget 2018-18 proposes a Long-term capital Gains tax on sale of Equity
shares / units of Equity oriented Fund if more than Rs 1 lakh at @ 10% without the
benefit of indexation from i.e. from 1st April 2018. Securities Transaction Tax
- STT is levied by government on every transaction done on stock exchange (NSE or
BSE). The STT is applicable at different rates on the value of the "taxable securities
transaction". This tax amount is included in the amount you pay to your stockbroker
for any purchases or sales you make. The stock broker collects this amount and pays
to the stock exchange on your behalf.