Investing in equity shares means purchasing the shares of a company listed on a stock exchange. There are two markets for this
Why Experts Say That Investing In Equity Is Right For Oneself?
When you have participated in the IPO of a company going to be listed on stock exchanges.
When you have to buy shares via a stock exchange. When you trade in equity through a stock exchange, you have to make use of the services of a brokerage firm, which acts as your agent whenever you buy or sell.
Equity is considered a high risk-high return investment avenue. This is because there is scope for considerable appreciation or loss of the capital that you invest, depending on various factors such as the performance of the company that you have invested in, general market conditions, the state of the economy, etc. However, it forms an integral part of any well-balanced portfolio, since it is at one end of the risk-return spectrum.
Equity forms the part of any well-balanced portfolio. You must hold some portion of your assets in equity because it is the only instrument that has the ability to truly deliver a high return, when held over a long period of time.
How Should One Decide Right Share, Right Price And Right Time Of Investment?
However, the amount of equity that you hold in your portfolio is a very subjective decision and will depend upon various factors. These include your investment objectives, time horizon and risk appetite.
Equity investment requires certain amount of homework to be done:-
How Is The Price Of The Stocks Determined?
- Short list the shares that you want to buy on the basis of your investment objective, risk profile and the stock’s fundamentals.
- If you feel that the price of a stock is high, don’t purchase it. Buy stocks that you believe still have scope for appreciation.
- Predefine the levels of entry & exit.
- Don’t hesitate to liquidate your portfolio before your target time horizon if circumstances lead you to believe that it’s necessary.
Demand and Supply
How Do I Go About Investing In Equity?
When there are more buyers than sellers for a particular stock its demand rises and so does the price. When supply overtakes demand (that is, sellers exceed buyers), the stock loses value.
Future Growth potential
Buyers are willing to pay a premium for stocks of companies that have the potential to increase their revenues and net profits. The greater this growth potential, the higher the premium given to the stock.
For investing in equity, you need to open the following accounts:
How Canmoney Can Be Useful To Me?
- A trading /broking account with CBSL.
- A demat account with Canara Bank.
- A bank account with Canara bank for cash payments and receipts
Canmoney can be of immense use to you. It acts as a medium between your dreams of ideal investments in equity and mutual funds. It provides you the investment avenues, craved out by our experienced research team.
How safe are my user ID and password?
It provides you the direct access to NSE & BSE both on real time basis i.e. without any time leg with superior service and best technology available.
The generated user identity and password cannot be accessed through the Internet. Only our authorisation engine can access the user ID and password, and no one can manually or electronically access it. Also, the clients' user ID and password are encrypted while travelling through the Internet, as 128-bit encryption technology is in use.
What Are The Risks To Which One Is Exposed While Investing In Equity?
This ensures that that no one can gain access to the information being shared by the client over the net. The 128-bit encryption encrypts every alphabet or number typed by the client on his/her computer while transacting at our site. Currently, 128-bit encryption is the strongest form of encryption available, and to date, there have been no reports of any hacking incidents through it.
Return on equity is subjected to various risks that companies are exposed to like:-
What Do You Understand By Marked To Market (Mtm)?
These are business risks (the risks associated with the prosperity and continuity of a business), financial risks (financial soundness of a company), industry risk (changes in technology, regulations, fashions, etc., affect the performance of an industry), management risks (the level of corporate governance, management skills and vision), political, economic and exchange rate risks (these factors affect a company but are outside its control). There are other risks, such as market risks (the risk that the market will collapse, or that you have invested at the peak), which determine your returns on your equity investment.
MTM is the difference of the market price less yesterday's closing price.
What Do You Understand By Hedging?
A type of transaction that limits investment risk with the use of derivatives. Hedging is just a way of insuring an investment against risk. Hedger eliminates the price risk of physical material he owns by taking an offsetting position in futures market.
What Is Arbitrage? How Can We Make Money Through Arbitrage Opportunities?
A trading strategy that works on the principal of taking advantage of price differences of the same share or commodity, trading on different exchanges. It is the simultaneous sale and purchase of an equity or commodity in order to book a profit from a difference in the prices.
What Do You Understand By Speculation?
Speculating is taking a position based on expectations about whether prices will rise or fall in the future hoping to profit from the price change.
What Is 'Go Long'?
It means buying a commodity in anticipation that the price will go up.
What Is 'Go Short'?
It means selling a commodity in anticipation that the prices will come down.
What Is Stop Loss (Sl)?
Stop loss is the limit of loss that a buyer is putting willingly, if price movement of the stock moves adversely. By placing a stop loss order, Investor actually sets a loss level which he/she is willing to undertake.
How Is Income From Equity Investing Taxed?
No tax is applicable on the dividend receipts. However, one is required to pay short term capital gains tax on any short-term gains (i.e. gains trough selling the shares held for less than 12 months). The rate of tax payable on such gains is 11.22 per cent (10 per cent tax + 2 per cent education cess + 10 per cent surcharge, if applicable).
What Is The Grievance Redressal Facility Available For Equity Investing?
There is no tax on long-term capital gains (i.e. Shares held for more than one year).In addition, one has to pay Securities Transaction Tax (STT). The STT rate for delivery-based transactions is 0.125 per cent of the transaction value for both buyers and sellers. For non-delivery based transactions, STT of 0.025 per cent of the transaction value is payable.
If you have grievances against a listed company/ intermediary registered with SEBI, you should first approach the concerned company/ intermediary against whom you have a grievance. Then, if you are not satisfied with their response you can approach SEBI, who is the regulatory authority for such entities. SEBI takes up grievances related to issue and transfer of securities, non-payment of dividend, etc. with listed companies. In addition, this market regulator also takes up grievances against various intermediaries that are registered with it. Visit http://www.sebi.gov.in/ for more information.
What Do You Mean By The Term 'Derivatives'?
Derivatives are the newly launched financial instruments, whose values are entirely "derived" from the values of the underlying assets. The underlying assets can be securities, commodities, bullion, currency, livestock etc.
Derivatives can be of several types like forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities.
As per Securities Contracts (Regulations) Act, The term Derivative has been defined as:-
What Do You Mean By The Term 'Futures Contract'?
- a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;
- a contract which derives its value from the prices, or index of prices, of underlying securities
Future contracts are the organized/standardized contracts in terms of quantity, quality (in case of commodities), delivery time and place for settlement on any date in future. The contract expires on a pre-specified date which is called the expiry date of the contract. On expiry, futures can be settled by delivery of the underlying asset or cash. Cash settlement enables the settlement of obligations arising out of the future/option contract in cash.
What Do You Mean By The Term 'Option Contract'?
An option contract is defined as "a promise which meets the requirements for the formation of a contract and limits the promisor's power to revoke an offer. The buyer / holder of the option purchases the right from the seller/writer for a consideration which is called the premium. The seller/writer of an option is obligated to settle the option as per the terms of the contract when the buyer/holder exercises his right. The underlying asset could include securities, an index of prices of securities etc.
Options are of two kinds
- American options and
- European options
An Option to buy is called Call option and option to sell is called Put option. Further, if an option that is exercisable on or before the expiry date is called American option and one that is exercisable only on expiry date, is called European option. The price at which the option is to be exercised is called Strike price or Exercise price.
What Are Index Futures And Index Option Contracts?
Therefore, in the case of American options the buyer has the right to exercise the option at anytime on or before the expiry date. This request for exercise is submitted to the Exchange, which randomly assigns the exercise request to the sellers of the options, who are obligated to settle the terms of the contract within a specified time frame.
As in the case of futures contracts, option contracts can be also be settled by delivery of the underlying asset or cash. However, unlike futures cash settlement in option contract entails paying/receiving the difference between the strike price/exercise price and the price of the underlying asset either at the time of expiry of the contract or at the time of exercise / assignment of the option contract.
When an Index becomes an underlying asset for a future derivative contract in place of any equity, commodity or currency, it is known as Index future Contracts. For example, futures contract on NIFTY Index and BSE-30 Index. These contracts derive their value from the value of the underlying index.
What are Exchange Traded Funds?
Similarly, the options contracts, which are based on some index, are known as Index options contract. However, unlike Index Futures, the buyer of Index Option Contracts has only the right but not the obligation to buy / sell the underlying index on expiry. Index Option Contracts are generally European Style options i.e. they can be exercised / assigned only on the expiry date.
By its very nature, index cannot be delivered on maturity of the Index futures or Index option contracts therefore, these contracts are essentially cash settled on Expiry.
An ETF is a basket of stocks that reflects the composition of an index, like S&P CNX Nifty or BSE Sensex. The ETF's trading value is based on the net asset value of the underlying stocks that it represents.
How is an ETF related to a mutual fund?
ETF’s are issued as UNITS by mutual funds. They derive their value from the value of the underlying stocks comprising the index. Therefore, their value moves in the same direction as that of the stocks comprised in the index against which the UNITS are benchmarked.
Some trading tips
- Never try to fight a trend by taking positions against the prevailing trend.
- Always take care of your losses and profit would take care of themselves.
- Always book profit on reaching the targeted price. Keep track of your stocks and there is nothing wrong in buying a stock at slightly higher levels after having booked profit earlier.
- Stop loss should be practiced religiously.