New to Equities?
So, you are new to equities? Or you've dabbled around bit, but are still trying to find your feet? You've come to the right place! In this section, we take you through the very basics of investing in the stock markets. The A-B-C, so to speak.
Stock markets the world over are hugely popular. It is estimated that the cumulative size of all stock markets in the world is approaching some $40 trillion. Which is about half the size of the world’s entire economy.
Companies list their shares on various exchanges, after which, investors trade in these shares through the exchanges they are listed on.
Shares get listed when a company goes public – ie, it offers its shares for sale to other investors, through the IPO (Initial Public Offering) process. Companies go public to raise money for various needs – expansion, diversification, buying new plants, etc. Once the shares are listed, they are traded between investors who may be individuals or institutions.
There are several stock exchanges in India. However two of them – National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) – are huge, and between them, corner most of the trading business. The BSE, in fact, is Asia’s oldest stock exchange. Though relatively new, the NSE (established 1992) has grown phenomenally, to become India’s largest stock exchange and the world’s second-largest in terms of number of trades. In India there are about 6000 listed companies.
Both the BSE and the NSE are generally open for trading between 9 am and 3.30 pm, but are shut on Saturdays, Sundays and designated public holidays. To facilitate longer hours of trading the opening bell was recently advanced to 9 am. While there is still talk of extending the evening hours, this has been shelved for now.
On Destimoney you can trade on both the NSE and the BSE
Trading is the simple action of buying or selling a stock. At any given moment in a trading day, at least in liquid stocks, there are buyers and sellers who route their orders through the exchanges. These orders are at various prices in the vicinity of the last traded price, and for various volumes (number of shares).
The moment a buyer and a seller ‘agree’ on a price, the trade goes through and becomes the last traded price or current market price (CMP). Naturally, this CMP keeps fluctuating through the trading day until the close of trade. This closing price is what you see in your newspaper listings the next morning.
Again, to strip equity trading to its very basics… the entire deal is about buying a stock at X price and selling it at Y price. X-Y multiplied by the number of shares you traded, represents your profit or loss. As simple as that!
You can make as many trades as you desire through the trading day. You may choose to ‘square off’ these trades or ‘take delivery’ of the shares.
Squaring off means selling the same number of shares you bought (earlier in the day), any time before the end of trading hours. The difference in share price between buy and sell, less any brokerage and taxes, determines your profit or loss.
Once the trading hours are over, you automatically take delivery of the shares you bought but didn’t square off, ie these shares are credited to your demat account three trading days later (known as T+2, where T is the day of trade).
Stocks are held in a demat account, which is an electronic account akin to a bank account – the only difference is one holds stocks, the other money. Earlier, stocks were traded in a physical (or certificate) form. The advantage is that today you can even trade as little as one single share, though for lower priced shares this is an unrealistic thing to do.
This does not mean that there are no more shares around in physical form. A few investors still hold such certificates. However, they are not tradable in this form. You need to dematerialise these shares before trading. To know more about how you can do this on Destimoney, click here.
When you buy a share you have to pay for it before getting credit of the shares. Similarly when you sell, you have to transfer those shares to the buyer before receiving payment for them.
This can be done through a broker, but many active traders today prefer the seamless, hassle-free and automatic process of trading online.
You can do that right here on Destimoney, by clicking here. It’s far simpler and smoother than most other online trading sites.
When trading on Destimoney, your trading account is linked to an online demat account and an online savings account. When you buy a stock, there should be sufficient balance in your linked bank account. Similarly when selling, the number of shares traded need to be present in your demat account.
When you buy a stock, your linked savings account gets debited to the extent of the trade value, plus brokerage and taxes, and the shares get credited to your demat account. When you sell, the reverse happens… the number of shares traded leaves your demat account and the value of the trade, less brokerage, and taxes, gets credited to your savings account. All of this happens automatically, without any action on your part other than placing the buy or sell order.
As you see, things are amazingly simple on Destimoney.
Needless to say, you can check your demat and bank balances online any time, 24x7x365.
The good thing about buying stocks and shares is that some companies also give you a dividend. This is nothing but a distribution of part of its profits each year between all its shareholders. This dividend too, gets credited to your savings account automatically.
Presently dividends are not taxed in the hands of investors, so it’s really tax-free income!
Of course, to distribute dividends a company has to first make profits. So if you're looking for regular dividends it's a good idea to know which companies are regular profit-making companies. You can do so by going to our RESEARCH page.
It is not imperative to announce a dividend. Many companies do not give a dividend simply because they either did not make profits during the period in question, or decided to deploy the funds for specific purposes.
At the other end of the spectrum are companies that announce more than one dividend every year: although such companies are few and far between.
Some investors invest in ‘dividend yield’ companies, as part of a strategy. This works in case of low priced stocks that announce hefty dividends. So, for example, if a stock is trading at say Rs. 10, and the dividend works out to Rs. 3 per share, then the dividend yield is 30%. When you think about it, 30% per annum is handsome yield, when you consider the normal range of Fixed Deposit interest is 6-12% per annum.
Equity investing is possibly the most attractive investment avenue because all long-term profits (shares held for over one year) are completely tax-free, while short-term profits are taxed at just 15%. Of course, there is a tax imposed on every trade – but this Securities Transaction Tax (STT), is too small to worry about, especially for small investors.
Over a period of time, some companies resort to issuing bonus shares or announcing stock splits. This decision may again be a result of the company sitting on surplus profits, or as a mechanism to make its share price more affordable. Companies may also offer rights or preference shares.
Bonus Shares
When bonus shares are announced, every shareholder in the stock gets additional shares in the ratio announced. While some companies give fewer additional shares than those held (Ratio lower than 1:1), some announce a 1:1 bonus (one additional share for every one held), and some in a really generous mood, may even allot more than one additional share for each one held.
Investors eligible for bonus shares do not pay any money to get these. These get automatically credited to the demat account of the relevant shareholder.
Of course, the day the bonus shares kick in, the market automatically adjusts the share’s price. That is, for a 1:1 bonus, if the CMP is Rs 100, then post bonus the price will automatically adjust to about Rs.50. While you may think this cancels out the very benefit of bonus shares, the fact remains that share prices tend to move up faster from lower values. So you do make bigger profits post a bonus issue.
Stock Splits
All shares have a face value. This is the value of each share before the premium that may be attached when a company goes public (IPO). After a company lists, the price will fluctuate infinitely depending on innumerable and ongoing factors.
However the face value never changes, unless the company announces a stock split. Most shares have a face value of Rs. 10 (though this is not the rule). At any time the company may choose to split the stock into a lower face value. When it does, the number of shares held by a shareholder proportionately increases, but the share price falls in proportion.
In very rare cases a company may announce a reverse stock split, wherein the opposite happens. That is, the face value increases, as a result of which the number of shares held decreases, and the share price increases proportionately.
Again, investors do not have to make any payment during stock splits, and the entire process is automatic.
Rights and Preference Shares
Sometimes, a company may choose to raise capital through a Rights Issue. This is an offer to all existing shareholders to purchase a proportionate number of shares at a lower price during a specified period.
A Rights Issue differs from an IPO in that only existing shareholders are eligible to participate, while an IPO is open to the general public at large.
A shareholder participating in a Rights Issue has to make relevant payments, although they may choose to forgo their rights, or even renounce them in favour of another person, and get a consideration for them.
Preference shares are issued at a specified price, to a specified class of shareholders only.
To be eligible for bonuses, stock splits, rights or preference issues, an investor should be an existing shareholder of the company on a specified date announced by the company. Such dates are called Record Dates.
All the above information is merely the tip of the iceberg as far as equity investing goes. But, as promised we’ve tried to address just the simple basics. If you’re sufficiently primed, it’s probably a good idea to shadow-invest by visiting our TRADING DEMO module, which takes you through the process of placing orders on Destimoney, checking your demat or savings account, order and trade books etc.
Or if you’re ready for the real thing, why waite any longer…? CLICK HERE and join millions around the world who trade online!
