FAQ
What is equity?
Equity is a financial instrument which represents an ownership interest in a company. Investing in equity of public limited companies that are listed on a stock exchange entails acquiring the shares or stock of the company.
While equity is considered to be a high risk return investment due to the huge scope of appreciation or loss on capital as it directly depends on the company’s performance, general market conditions and the economic situation of the country, it occupies a prominent place in most investors’ portfolio.
Why should you invest in equity?
Despite being a high risk investment, equity remains the most popular form of financial investment. In spite of market ups and downs, equity remains the best performing asset class over a long period of time. So, it is important that every investor must allocate some part of his portfolio towards equity shares. By buying a stake in a company, an investor seeks returns in form of capital appreciation. Further, many companies reward their investors by paying dividends which are a part of their earnings. You can build your portfolio by reinvesting these dividends.
If you have an appetite for high risk, then equity should form a major portion of your portfolio. On the other hand, for risk-averse investors who seek assured returns, at least some portion of their portfolios should be allocated to equity to spice up their portfolio.
In general, the proportion of your investment in equities depends on various factors such as your investment objectives, time horizon and risk appetite. A thumb rule states that if you reduce your age from 100, that’s the proportion of your funds you should allocate to equity.
How to pick a stock?
By tracking and analyzing stocks, you can spot and cash-in on opportunities as and when they emerge which will maximize your profitability. While relying on advice of brokers and market experts should form the basis for your selection process, due consideration must be given to your investment objective, risk profile and the stock fundamentals. Fundamental analysis will tell you whether a stock is currently undervalued, correctly priced or overvalued, thereby enabling you to choose the scrip that has a scope of appreciation. An investor must not hesitate to rein his equity portfolio if the company’s business prospects deteriorate or investors’ circumstances or objectives change.
What factors determine the price of a stock?
The value of a stock reflects its true price. The factors that determine the price of a stock include demand and supply and the fundamentals of the company including its growth potential.
Demand and Supply: In the short term, the basic economic theory of demand and supply determines a stock’s worth. So, when the demand for a stock exceeds its supply (that is, there are more buyers than sellers), its price tends to rise. And, when supply overtakes demand (that is, sellers exceed buyers), the stock loses value. However, these are short-term market trends, which tend to get evened out over a period of time. In the medium to long-term, a stock is driven by the company’s fundamental strength i.e. business potential, past performance, competence and credibility of its promoters, management, etc.
Growth Potential: Investors 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’. If a company proves that it is capable of sustaining growth, the market will continue to give it high valuations. And, that’s likely to be the major driver for stock valuations.
Fundamentals: A company’s growth outlook is linked to its business prospects and how well its management is capitalizing on the existing opportunities. The quality of a company’s management is crucial. So, pay attention to the management practices of a company and its level of corporate governance.
When is the best time to buy/ sell stocks to maximize profits?
The general thumb rule is to buy at a low price and sell at a high price to earn profits. However, many investors commit the folly of investing in overvalued stocks or stocks that have surged and are basking in the media spotlight. Instead, stocks that have had a recent good run may be overbought, offering an opportunity to sell rather than buy (sell high). Similarly, it’s a great idea to invest in a stock that has had a bearish run (buy low) as long as the fundamentals of the stock are bullish in the long term. In conclusion, an investor can profit by buying high-quality stocks when they are undervalued, and sell when the stocks become overvalued.
What are the risks in investing in equities?
An equity investment does carry certain risks. Some are related to the particular stock including the company’s business prospects, also known as unsystematic risk. However, some risks are common to all stocks i.e. market risks and macro-economic risks, which are also known as systematic risk. Investors can almost entirely eliminate unsystematic risk by a diversification strategy which will reduce his exposure to a particular sector or stock.
Risks in equity investment are
Business risks- these risks are related to the success of the company’s business and the demand for its products. It is related to the company’s performance including its ability to capture market share.
Financials risks- these risks concern the company’s ability to manage its finances to ensure that it has an optimum level of debt, equity and reserves. Higher levels of debt or financial leverage may mean higher interest costs and reduced earnings to equity shareholders.
Industry risk- Industry in which the company operates is affected by changes in technology, regulations and fashions, which in turn may affect the performance of the company.
Management risks- the level of corporate governance, management skills and vision.
Political, economic and exchange rate risks- these macro-economic risks affect all stocks and are outside the control of a company.
Market risks- this is the risk of investing in the stock market in general. It is the risk that the market may turn bearish or that you have invested at the peak of the market cycle.
What is the process of investing in equity?
To invest in equities, an investor needs to open the following accounts.
- A broking account with an authorized stock broker
- A Demat account with a depository participant
- A bank account for cash payments and receipts.
You may also use your existing bank accounts for this purpose. Additionally, an investor must decide that whether he wants to invest by making purchases or taking delivery of shares or by undertaking margin trading wherein an investor has to only pay a portion of the purchase price while the broker funds the remaining cost of shares. Margin trading which can magnify your buying power doesn’t involve delivery of shares as an investor only books profits or loss.
How is income from equity investing taxed?
Dividends received are not taxable in the hands of shareholders. However, short-term gains from equity investment attract a capital gains tax. If an investor gains from selling equity shares that were bought and sold within a period of less than one year, he is liable to pay short-term capital gain tax. The rate of taxable in this case is 11.22% (i.e. 10% tax + 2% education cess + 10% surcharge, if applicable). However, in case of gains from shares sold after 1 year from date of purchase, there is no tax.
Further, an investor is obligated to pay a Service Tax at the rate of 12.24% on the brokerage charges that he pays. In addition, a Securities Transaction Tax (STT) on certain types of sale and purchase transactions of shares is levied. The STT rate for delivery-based transactions is 0.125% 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.
Is there a grievance redressal facility for equity investors?
Yes, equity investors have the opportunity to express their grievances against a listed company registered with the Securities and Exchange Board of India (SEBI). Firstly, the investor must approach the company against whom he has a grievance. In case, his issue is not resolved to his satisfaction, an investor can then take the matter to the capital market regulatory watchdog SEBI, which resolves grievances such as issue and transfer of securities, non-payment of dividend, etc. with listed companies.
How does a broker receive an order for trade?
A broker, who has a crucial role to play in equity market transactions, acts as an intermediary between the buyer and seller of the stock. A broker may receive an order for trade via an NCFM certified authorized dealing desk, through an internet online trading platform, via a NCFM certified authorized call and trade desk, or by an after-market hour facility.
Explain the process via which orders are transferred to NSE and BSE
All Orders entered by customers are received in form of Contract Note that are through an Exchange certified and audited software, these notes are exact and are without any modification in the orders as placed by the client. These orders are passed through Risk Management System at Brokers end for checking the availability of margin in customer’s ledger and then they are pushed to Exchange platform for execution with same logic as defined by the exchange i.e. It has rate and time stamp along with client code as uploaded to the exchange.
Are there any counter party positions created by broker?
No, there are no counter party potions created by brokers.
How is Mark to Market debits and credits maintained at brokers’ end during trading hours?
All the mark to market calculations of clients are maintained at brokers’ end during trading hours in accordance with exchange regulation calculation rules in the certified software. However, in case a client has FNO positions, mark to market margin is maintained at exchange level for broking clients.
Are all orders entered by registered clients going to exchange?
Yes, all orders that are entered by clients are going to the exchange. There is one single order book maintained by the exchange for all brokers and all clients.
How can a customer verify his trades with exchange platforms?
All trades are time stamped at the time of entry to the exchange system and are given a unique code. Further, same timestamp and unique code is given on the contract note by the broker. If a client wants to verify the trade on the exchange platform, he can enter the unique code number on the internet facility given by exchange and check the respective trade details.
How are contract notes delivered to clients?
According to regulations, clients can choose either physical contract notes or electronic contract notes (ECN). If a customer opts to receive electronic contract note, digitally signed contract notes are delivered to clients via their registered email ID. Similarly, if a customer opts for physical contract notes, a physical contract note is delivered. In case a client has signed for internet trading, he is compulsorily delivered electronic contract notes.