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Equity - FAQs

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.

In India, there are two primary exchanges; the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

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.

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, residence 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.

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, residence 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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

A derivative is an instrument whose value is derived from the value of one or more underlying, which can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc.Four most common examples of derivative instruments are Forwards, Futures, Options and Swaps. The value of a derivative is based on the expected future price movements of their underlying asset. Derivatives are often used as an instrument to hedge risk for one party of a contract, while offering the potential for high returns for the other party. Derivatives have been created to lessen fluctuations in stock, bond, commodity, and index prices; changes in foreign exchange rates; changes in interest rates etc.

Futures are exchange-traded contracts to sell or buy financial instruments or physical commodities for a future delivery at an agreed price. There is an agreement to buy or sell a specified quantity of financial instrument commodity in a designated future month at a price agreed upon by the buyer and seller.The contracts have standardized specifications like market lot, expiry day, unit of price quotation, tick size and method of settlement.

An Option is a contract that grants its owner the right, but not the obligation, to make a transaction in an underlying commodity or security at a certain price within a set time in the future. The underlying commodity or security could be anything. Equity shares are one major type of underlying asset. The right to sell a security is called a ‘Put Option’, while the right to buy is called the ‘Call Option’. Just as futures contracts minimize risks for buyers by setting a pre-determined future price for an underlying asset, options contracts do the same however, without the obligation to buy that exists in a futures contract.

  • Tax Treatment:-

    Long Term Capital Gains Tax (LTCG) – 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.
    Short Term Capital Gains Tax (STCG) – It is payable at 15% if securities are held for less than 1 year.

  • Other Charges;-
    • 1GST- Central Goods and Services Tax (CGST) @9% and Integrated Goods and Services Tax (IGST) @9% are payable to the government for every trade executed.
    • 2Transaction Charges - Transaction charges are levied as follows - (For NSE @ 0.00325% and for BSE@ 0.00275%)
    • 3SEBI charges - Rs 20 per crore on total turnover.
    • 4Stamp duty charges - Stamp duty are 0.0002% for intraday and 0.01% for delivery.
    • 5 Securities Transaction Tax – STT is levied by government on every transaction done on stock exchange (NSE or BSE). The STT is 0.1% on buy and sell for Equity delivery. 0.025% on sell for Equity intraday . 0.01% on sell side for Equity Futures and 0.1% for sell side of Equity options ( Levied on premium)
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