India has one of the youngest population in the world and many of them are so keen to invest in shares and stocks that they do not know where to start from. We have tried to put in place a beginners guide on how to invest in shares and stocks in India. Let us start...
What are shares and why are they issued?
Equity shares are issued in India, so a businessman may expand his business and share the profits of the company with shareholders through dividends and bonus. So, a company issues shares to the public through an Initial Public Offering also called IPO and the shares are then listed on the stock exchanges.
If it is an existing business the price of the shares are determined by the company along with the managers to the public issue. Recently, Avenue Supermarts came-up with a public issue at Rs 299, which investors to the issue invested heavily. So, you subscribe to the IPO and if you are allotted shares, you can sell them on the BSE and NSE when they are listed.
Today, investors who invested in the shares of Avenue Supermarts have made bumper profits, as the shares are way above the Rs 299 levels.
So, in short you buy share A at Rs 100 and if the price is Rs 200 after five years and you decide to sell, you have doubled your money. That is not all - when you were a shareholder for 5 years, you may (or may not) have received dividends, bonus or rights shares, which further increases your returns. Calculations are not complicated and it is simple maths at work.
There is something called fundamental analysis which we shall take-up later in the article to decide what should be an attractive price to buy a share. We shall discuss how to do fundamental analysis and value a share later in the article.
What you need to do to buy shares in India?
Beginners to investing in stocks markets in India first need to contact one of the brokers, who are members of one of the stock exchanges in the country. Typically, these would be brokers like Sharekhan, Geojit, India Infoline, Angel Broking etc. In fact, there are plenty of them.
They would help you fill a form and would need passport size photographs, address proof and also ID proof. They would then proceed to open two types of accounts; one is a trading account and the second is a demat account. A trading account is meant to buy and sell shares, while a demat account is meant to hold your shares.
What is this demat account?
Have you seen a bank statement? Demat account is just similar and is an account to hold your shares in the electronic form. Each time you sell shares they are debited from your account and each time you buy shares they are credited to your demat account.
If you sell shares they are debited from your demat account and the bank account is credited. Each time you buy shares, you have to pay and the bank account is debited and the demat account is credited with the shares bought.
What are the benefits of buying equity shares?
Unlike bank deposits, which give you only interest rates, equity shares offer you plenty. As a shareholder you receive dividends, bonus and rights shares. But, the biggest benefit is the capital appreciation that you get from shares.
For example, if you buy a share at Rs 100 and it goes higher to Rs 110, you can sell the same at a profit of Rs 10. So, in short the benefits are plenty.
How do companies know that you are a shareholder to give dividends?
All your shares would be held through two depositories, that is NSDL and CDSL. Let us say that Reliance Industries wants to give dividends. It will get the list of shareholders from these two depositories and the dividends would be directly credited to your bank account. Similarly for bonus shares or any notice that a company wants to give its shareholders.
How do share prices move?
Share prices like any other commodity largely move on the basis of demand and supply. Higher is the demand, the greater would be the movement of the shares on the higher side. On the other hand, if there is a huge selling pressure, the prices would be lower.
To buy shares you can ask your broker to do the same, or you can do it yourself through the online mechanism.
However, you should be familiar with the brokers software package before you buy and sell through the online platform or it could be a risky proposition.
When to buy shares and make a profit?
Price movement of shares is uncertain and there would probably be no investor who has always made money in shares. It is risky and you should be prepared for losses along side profits.
Anybody trying to predict the exact market movement is trying to play smart. So, you need to be careful when you hear things like "buy now you will definitely make a profit".
If you are beginner to investing in stocks, the best thing would be to take guidance from your broker. These brokers tend to prepare research reports, which are definitely helpful for investors and some of them talk to the managements of companies to get a more accurate picture of prospects for a company.
Are shares a better investment than real estate and bank deposits?
It all depends on what shares you have bought. If you have purchased shares that are of low investment grade, you would have not made any returns and in fact your capital would have been eroded.
However, if you have bought quality shares, you would have definitely made superior returns. Now, let us just compare the returns of equity mutual funds, which park money in shares, when compared to banks. In the last three years, the average returns from these funds are more than bank deposits.
In fact, the returns in most cases are double that of bank returns. So, in a way equity shares have delivered better returns than bank deposits, if you have stuck to quality shares.
How to do fundamental analysis of shares and know valuations are attractive?
If you are buying shares, there are many things that you need to study. If you really need to know the basics of how to analyze a stock and see if valuations are attractive, you must definitely read this very simple article: 6 key ratios to look for when buying shares
This article will help you understand some ratios that you need to analyze, while buying shares. Investing in shares is very dynamic as business prospects change rapidly, due to regulatory hurdles and competition. Look at the competition that is happening in the telecom sector today and the margin squeeze.
Looking at the regulatory changes that have affected the steel sector. In short, business prospects change and so do share prices.
Taxation on shares
Dividends received from shares are tax free up to Rs 10 lakhs. On the other hand, if you buy shares and sell the same at a profit after 1 year, there is no capital gains tax that you have to pay on the profit.
On the other hand, if you buy shares and sell at a profit, before 1 year, you have to pay a capital gains tax.
Shares are very tax efficient instruments, which make them even more attractive.