Prajna Capital

All you wanted to know about stocks

Posted: 04 Oct 2014 03:13 AM PDT

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All you wanted to know about stocks

1. What is a stock?

A holder of stock (a shareholder) has a claim to be a part of the company's assets and earnings. In other words, a shareholder is an owner of a company. The ownership of the shareholder is determined by the number of shares a person owns relative to the number of outstanding shares.

2. Why should I invest in stock market?

The stock market is a popular form of investment for investors. Investing is just a smaller part of a much bigger thing called financial planning. Stock market can give you multiple returns that no other asset class can match but with the same amount of risk. There are various reasons to invest in stock market
a) To provide for a longer life span – you need to plan for your future and save for post retirement period. With investment, you can have some savings to take care of you when retired. But the investment in share market should start early as long-term investment can get better returns.
b) To beat inflation – investing at the right time can save you during inflation; stocks are a good hedge against inflation. Inflation erodes your purchasing power and puts pressure on your fixed income. At that time, investments or a part of asset that you kept aside as investment in stocks may help you during inflation.
c) To maintain your standard of living – investment in stocks can maintain your standard of living post retirement even during a rise in price of various commodities.

3. How to invest in stocks?

Investing in stocks is not at all difficult; it just needs the understanding of how market works and what are the modes or requirements to invest in stock market.
a) You need to identify your goals
b) Plan the time horizon i.e for how long you want to invest and meet your requirements.
c) Decide on how much you would need to accomplish your goals
d) Qualitative analysis of the company is also important before investing
e) Select the investment option available in market such as fixed income or debt instrument, equities and this also depends on your future needs and risk profile
f) Select an investment method. It includes investing through mutual fund, brokers or managing it yourself.

4. How to select a stock for investment?

Selecting a stock requires a lot of research work. These include:
a) The first step includes selecting a sector for investment such as information technology (IT) sector, auto sector, energy, aviation etc.
b) Once you have selected a sector, the next step is selecting a company within that sector. It involves large-cap, mid-cap and small-cap companies
c) See the past performance of a company you choose to invest in
d) Fundamental analysis which involves evaluating company's balance sheets and various ratios
e) Diversify your investment to reduce risk
f) Look for a long-term investment for better returns

5. When should I start investing in stocks?

There is no time limit or age to start investing in stocks, but if you start investing early you can gain the benefit for investing in long term and get better returns. Whereas, if you invest late, the benefit which you would have got may be less, the level of risk which you can take also becomes low resulting in low risk, low returns.

6. What are the types of shares in India?

According to company law there are two types of shares in India
a) Preference shares: Preference shares are those shares which are given preference regards to dividend portion which is fixed profit. They are less risky than equity shares. For example, in case of low profit, a company first pays to preference shareholder and may not pay to equity shareholders.
b) Equity shares: They are the ordinary shares and do not enjoy any preference. The dividend paid are fluctuating.
Other types of shares includes
a) Deferred shares: These are held by the founders of the company. Profit to these share holders is given only when other shareholders receive their dividends.
b) Bonus shares: Bonus shares are free of charge. These are given to shareholders as a bonus. It is a bonus for all the existing shareholders in form of shares instead of cash.

7. What are the risks involved in investing in stock market?

Investing in share market involves risk. The types of risk are:
a) Market risk: The price of shares is not just driven by the internal environment or performance of the company, but also by supply and demand of its shares and the liquidity in market. It is always good to invest in long term to be safe form daily fluctuations in the price of shares.
b) Company risk: It is within the company that is failing to grow and the shareholders do not get any dividends. This type of risk cannot be avoided but can be minimised to greater extent and for this, you need to do full-fledged research before investing in a company.
c) Inflation risk: This is the risk of uncertainty on the future value and risk that inflation will have adverse effect on your investment. Here, you should research on the growth of your purchasing power during inflation.
d) Regulatory risk: The company is subject to some kind of regulation. It refers to risk if any new laws are introduced by regulatory body, which may affect the business.

8. What is a time horizon for investing in stock market?

Usually there is no time horizon as such to invest in stock market, but experts suggest investing for a long term to get better returns and one should start investing as early as possible.

9. How diversifying investment can minimise risk?

The investor or trader investing in stock market should always diversify the portfolio in order to minimise losses. Diversifying means investing in different sectors as investing in single or specific sector can be risky. For example, if IT stocks are hit and if you have invested in different sectors then it would not impact you much. But don't over diversify that managing it becomes difficult.

10. What causes stock prices to change?

Stock prices change every day due to supply and demand in market based on negative and positive outlook of people towards particular stock. The next thing that affects stock price to change is the earnings of company i.e the profit it makes. For example, if the results of company are bad then stock price falls and if they are positive then stock price rises. There are various methods that people use to determine the rise and fall in stock price, but it is just estimation as nobody can predict how the prices will change.

11. What is intraday trading? What is the difference between intraday and delivery trading?

Buying and selling of shares in a single trading session is called intraday trading. You can trade shares within seconds, minutes and hours in a day. It can give you profit when you analyse perfectly. In delivery trading, you buy shares and sell them after one day. The advantage of delivery trading is that you don't need to sell the share on same day even if it is at loss. On the other hand, the brokerage charges in intraday trading is very less as compared to delivery trading.

12. What is the process of taxation on investing in shares? What is a short term capital gain and long term capital gain?

There are various taxes levied on transactions in equity shares such as securities transaction tax (STT), service tax, capital gains tax. Under capital gains tax, there is short term capital gain i.e. if you sell the shares within a year of purchasing them and long term capital gain is levied if you sell shares after a year of purchasing them. The dividends earned on shares are tax-free.

13. What do bullish and bearish markets mean?

The terms bear and bull describe upward and downward market trends. The bearish market refers to decline in market while the bullish market refers to rise in the share market. Investors generally follow a buy low and sell high strategy.

14. What are primary and secondary markets?

There are two types of stock markets in India: primary and secondary market
Primary market is where a company issues its shares for first time, when it wishes to raise capital or expand its business operations. This is done through initial public offering (IPO). In secondary market, people buy the shares of the company already listed on the stock exchange. To carry out an online transaction in stock market, you need a demat account.

15. Which are the popular stock exchanges in India?

There are two main stock exchanges in India: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE index is known as SENSEX, while the NSE index is called as Nifty. Another exchange, other than these two, is a Multi Commodity Exchange (MCX) which is an independent commodity exchange in India.

16. What is an insider trading?

Insider trading is buying and selling of securities by a person who has access to information of company which is not public. It is illegal activity and unfair with other investors. One of the indicators of insider trading is spike in stock price before any major announcement by the company.

17. What are blue chip stocks?

These are stocks of well-established and large companies operating for many years. They generally pay stable dividends to shareholders and most investors have a positive outlook on stocks of these companies. Blue chip is a kind of nickname given to stocks which are mostly safer.

18. How can I buy stocks?

You can buy stocks of a company from a stock exchange with the help of a broker or you can also buy stocks online for that you need to have an online trading account.

19. How can I gain maximum benefit from investing in stock market?

Planning before investing is very important. It includes whether you want to invest for long term or short term. Though long term investment is considered better to gain maximum benefits, you should start with short term investing. Once you gain profit, you can expand the portfolio.
a) Set a goal: You should set a goal or objective and make strategies to achieve those in a specific period of time
b) Time value of money: It is a simple concept of making your money work for you. If you invest for long term you can gain maximum benefit
c) Calculating risk: There is always some amount of risk involved in investing in stocks. Here you need to calculate the amount of risk that you can take.
d) Diversification: Diversification of investment is diversifying your risk. Always have a mix of high and low risk investments. This is done to ensure that if you lose in one sector then you may recover your loss by gaining in another sector.
e) Invest consistently: Effective wealth building can be achieved by investing consistently in market.

20. What is securities transaction tax?
Securities transaction tax (STT) is levied on every single transaction that you do on the stock exchange. It gets added to the price of stock at the time of transaction so there is no way to avoid it.

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