Stocks and Shares

What is a stock / share ?

A share is a share in the share capital of the company. A shareholder is a part owner of the company, there fore has voting rights. He is entitled to a share of the profits of the company after all the other claim holders including the tax authorities have been paid off. The Profit After tax belongs to the equity share holder – after the preference shareholder has been paid his dividend. He gets an annual report of the company giving him details of what the company did during the year and its Profit and Loss account and the Balance Sheet.

Why should I invest in stock market?

As an investor what we look for is a REAL RETURN. Real return means actual return MINUS inflation. Debt, commodities, etc. give you negative returns, and equities give you POSITIVE returns. You need a nice big number compounding well if you have hopes of retiring whenever you want to retire. Such returns, though volatile, are necessary for you to build a corpus which could be used to meet your long term goals like children’s education, buying a house, retirement, etc.

How to invest in shares / stocks?

You need to first have a demat account. Once you have a demat account you can go to a broker / banker who will open a trading account. Once you have a demat account and a trading account you can start buying and selling shares through a broker – who is a member of a stock exchange. The broker is normally only expected to execute the transaction – which means YOU should know which share to buy and which share to sell. Practically, though brokers also act as ‘investment consultants’ and tell you which share to buy and which share to sell.

How to select a stock for investment?

In case you have a family history of investing in shares it becomes a little easier to invest! There are various websites dedicated to giving information about companies, industries, etc. this could be a starting point to know which share to buy. It takes a lot of effort and research to decide which share to buy. Once you decide on the industry pick up a few companies and read their balance sheet. Check for good companies with a nice track record, good shareholder attitude, and a nice future and short list them, On a day when it reaches an attractive price buy that share!

When should I start investing in stocks?

You can start investing when you are born! Even a minor can invest in shares through a parent or a guardian. However you can really start investing when you have money, have a demat account and an account with an equity broker – who is a member of a recognised stock exchange. You should start investing as soon as you earn and have built up some savings – there should be about 6 months expenses in bank fixed deposits before you start investing in equity shares. The sooner you start, the greater the impact of compounding, and hence greater the wealth created.

What are the types of shares in India?

There are largely 3 types of shares in India. When you say ‘shares’ we mean Equity shares or Ordinary shares. The other type of share that you see as an ordinary investor is ‘DVR’ – shares with differential voting rights. These shares do not carry the same voting strength as an equity share, but are generally compensated by getting a higher dividend than say an equity share. Tata Motors, Jain Irrigation, are 2 companies which have issued DVRs. The third type of shares is ‘Preference Share’. Preference shareholders get a priority when it comes to dividends and when a company is being wound up. However Preference shares are rarely listed, so as a regular investor you may not see it practically.

What are the risks involved in investing in stock market?

Risks involved in any type of investing is ‘Investing without knowledge’. If you do not know how the markets function you could lose a lot of money. Also markets are influenced by very many factors – national, international, economic, political, geographical…which means understanding equity or share market is a very difficult, time consuming, frustrating but rewarding. There could be huge fluctuations in the market, your whole capital could get wiped out, your broker could cheat, or you may underperform the index and / or the best mutual funds.

What is a time horizon for investing in stock market?

In the stock market you invest for a very long time. The people who tell you that the market is good place to invest could have been there for 30, 50, 70 years and created a lot of wealth. It is normally an intergenerational wealth transfer tool and not just for one life time. Having said that UNLESS you have a 5 year horizon coming to the share market as an INVESTOR makes no sense. However you could come in as a trader and do shorter term trades – with periods of holding in hours and minutes and not even days!