Stocks

 

 WHAT ARE THE STOCKS OF COMPANIES? 

Every company needs money for various purposes, primarily to execute their future growth plans. It could be for expansion, for repaying debts and promote growth, for improving infrastructure and many more.

Promoting investment in “Stocks” and “Initial Public Issue” (IPO) are some of the most popular ways of raising funds from the general public in exchange for shares of their company.

So when you buy such shares, you directly become the owner of the company in proportion to the value of the shares purchased. This means you will also share the profits the company generates and bear losses in case of crisis. Shares also get listed on the stock exchange where you can either sell them or buy more shares.

 

 

IMPORTANT POINTS TO NOTE ABOUT STOCKS

The following are some of the important features of the STOCKS that every investor must know.

1. Investor’s profile – It is best suited to investors with a very high risk appetite who can digest the complete loss of principal amount. An equity investor is the one who understands business good enough to be able to exploit market conditions to earn superior returns out of it. Equity investors need to be very patient and need to stay invested for a minimum of 5 to 7 years.

 

2. Risk – Equities are considered to be the high risk-high returns investment. It is so volatile that sometimes, it can also result in negative returns or loss of principal.

 

3. Liquidity – Equities are considered as highly illiquid as the investors are required to stay invested for a minimum of 5 to 7 years and cover multiple business cycles to make a profit. However, since it does not involves a lock-in, stocks can be sold anytime in the secondary market but if that happens during unfavorable market conditions, it can result in huge losses.

 

4. Taxation – Income earned from the sale of stocks is considered as “Income from capital gains”. Investment held for more than a year is considered as long term and returns earned up to Rs. 1,00,000/- is exempted from tax.

 

5. Volatile – Returns from equities are market-linked which makes them highly volatile.

 

6. Time horizon – Equities are suitable for investors having a time horizon of at least 5 to 7 years.

 

7. Regular Income – Some companies offer dividend payout periodically however, they are not guaranteed.

 

8. Returns – On an average, stocks can generate CAGR ranging from -50% to 100%.

 

9. Asset class – Equities invest directly in companies on profit and loss sharing basis.

 

10. Cost – No charges are applicable for investing in the stock of companies except brokerage that stock brokers charge.

 

11. Loan facility – In case of emergencies, investors can pledge their stock holdings as collateral to avail loan facility.

 

 

WHO CAN INVEST IN STOCKS?

Any Indian citizen including NRI, HUF or Institutional investor can invest in this scheme.

 

 

MINIMUM AND MAXIMUM INVESTMENT ALLOWED IN STOCKS

The minimum investment in the case of IPO is usually one lot which is equivalent to approximately Rs. 15,000/-. However, this depends on case to case basis and may differ across IPOs. Further, one can invest as many lots as they want to, to increase the chances of winning a bid.

There is no limitation of the minimum and maximum amount for investing in shares. Anyone can buy any number of shares as per their choice.

 

 

WHERE DO THESE COMPANIES INVEST YOUR MONEY?

The money invested in the company is utilized by them for various purposes like repayment of debt, developing infrastructure, upgrading technology or anything that promotes business growth.

Any profit the company generates or loss incurred will be shared with the investor.

 

 

WHAT KIND OF RETURNS CAN STOCKS GENERATE?

Equities are known for generating superior returns as compared to any other asset class. Since the money invested in stocks is invested directly in the company, it involves great risk of negative returns however, it also has high growth potential and capability of generating magical returns. It can generate returns in the range of 0% - 5000% if invested for more than 10 years.

 

HISTORICAL DATA OF RETURNS GENERATED BY SOME OF THE STOCKS

Returns that Sensex generated in the last 10 years

 

 

WHAT ARE THE BENEFITS OF INVESTING IN STOCKS?

STOCK offers the following benefits to its investors.

1. High returns – Stock investing is one of the most aggressive investment propositions known for generating extraordinary returns that can easily beat inflation. This can also give your long term goal planning some extra push in case your other investments failed to perform to your expectations.

 

2. Tax efficiency – Long term capital gains earned up to Rs. 1,00,000/- per annum is tax-free. Anything in excess is taxed at the rate of 10% of capital gains.

 

3. Low cost – Low brokerage fee with high growth potential as compared to other investment products makes stock investing very attractive among the long term investors who understand the market well.

 

4. Easy access to funds during hard times – Stocks are highly liquid. During emergencies, the money can be withdrawn without any hassle whenever needed. However, withdrawing funds during unfavorable market situations may result in losses. Hence, one should refrain from investing in stocks if they anticipate any expenses early on which may trigger redemptions.

 

 

WHAT ARE THE LIMITATIONS OF INVESTING IN STOCKS?

STOCK investing has the following limitations.

1. Lack of Experience – Most of the companies that take the IPO route for fundraising are young and new. Hence, lack of enough experience and unavailability of enough data for stock selection makes them even more risky and volatile.

 

2. Highly volatile and risky – Price of shares is performance-driven and is largely influenced by various macro and microeconomic factors where we have almost no control. This makes this option highly volatile and so risky that its investors are exposed to a risk of losing their entire principal.

 

3. No guaranteed returns – Returns in equities are market-linked which makes it unpredictable and uncertain.

 

4. Too many options – With the number of companies that exist in the current scenario, investors are left confused with where to invest and how to choose the best company and sometimes end up picking up the stock with very poor growth prospects. Hence, one should always take advice and use the knowledge of financial advisors.

 

 

WHO SHOULD CONSIDER INVESTING IN STOCKS?

STOCKS are most suited to the following investors:

1. Risk-takers – Young investors especially below 35 years of age with very high risk appetite who understand the financial markets well and can digest the loss of their investment amount, partially or fully to earn superior returns can consider this option.

 

2. Long Term Investors – Individuals investing for long term goals like retirement planning, children education, etc. who would not require those funds for at least 5 to 7 years.

 

3. High-Income Individuals – Investors who have the appetite to take risks of market volatility and fall under a higher tax slab of 20% or above can consider investing in equity mutual funds due to its tax efficiency.

 

 

WHO SHOULD AVOID INVESTING IN STOCKS?

STOCKS may not be the best investment for the following investors:

1. Conservative Investors – Anyone with a very low-risk appetite, having a lot of family responsibilities and liabilities should avoid investing in this asset class as it involves huge risk due to its volatility including the risk of principal loss.

 

2. Investors with high liquidity needs – Equity as an asset class is highly volatile and suitable for long term investing of beyond 5 years only. Due to this, frequent withdrawal at regular intervals is not possible. Hence investors with high liquidity needs should avoid investing in equities.

 

3. Investors nearing retirement– Investors nearing retirement should take very limited exposure to equities. Such investors may need funds in a very short duration and any market correction or fall can put their retirement planning at risk.

 

4. Senior citizens - Individuals above 60 years of age who are not willing to take any risk of market fluctuations and need regular income consistently should avoid investing in this asset class.

 

5. Over concentrated portfolio – Investors who already have an equity exposure of over 65% of the total investment portfolio. This is to avoid over-concentration on equity and control risk.

 

6. Investors looking for regular income – STOCK investment do not guarantee regular income to its investors. The dividend payout is subject to many conditions and paid to its investors only as and when declared.

 

 

A PIECE OF ADVICE

THINGS YOU SHOULD DO WHILE INVESTING IN STOCKS

STOCK investors must follow the below suggestions while investing to maximize the value of their investment.

1. Open a “Demat Account” – One cannot invest in IPO without having a Demat account. Hence, before investing, open a Demat account to be able to buy shares of companies.

 

2. Refer DRHP – “DRHP”(Draft Red Herring Prospectus) is a document that provides detailed information about the company’s business operations and financials. This includes details about its promoters, the reason for raising money, how the money will be used, risks involved with investing in the company and so on.

SEBI then reviews the draft and makes certain recommendations or changes to be made, if required. The amended document is then offered again to SEBI for approval. Once it is approved, SEBI then uploads the document called “Red Herring Prospectus” on their website.

 

3. Know your investment goal – One should bear in mind all pros and cons of investing in equities. Investment in equity markets is primarily meant for long term financial goals having a horizon of 5+ years.

 

4. Always diversify – The safest way of investing in equities is to diversify your risk across various sectors or companies. Concentration on one particular sector or a stock can be very risky and may result in loss of capital. Similarly, refrain from over diversifying the portfolio as it may dilute your overall gains.

 

5. Assess your risk appetite – One should always assess their risk appetite before investing in equities. Equities are considered as a high risk – high return investment. And someone with moderate income, sole bread earner of the family, low on savings, high on liabilities tend to have a very low-risk appetite as even a minor loss may derail their entire financial life. Such individuals should be very careful while investing in equity.

 

6. Select the highest bid amount – To get the allotment, one should bid for the highest amount from the given price band. A good IPO gets oversubscribed most of the time hence anyone bidding at a lower price will be eliminated. E.g. If the price band for an IPO is Rs 90-100 and an investor bids at Rs 95 and the actual pricing comes in at Rs 98, then the application will be rejected outright.

 

7. Apply for multiple lots – Getting the allotment is a matter of luck and the one who applies for a multiple bid lots stands the higher chance of winning a bid. Hence, in case of good IPO which is anticipated to get oversubscribed, one should make multiple applications in the name of their other family members to increase the chances of getting the subscription.

 

8. Update nominee details – Updating nominee details with the respective company or broker is very important. In case of an investor’s death, the family members should not end up running from pillar to post when they need that money the most to claim your investment proceeds.

 

 

THINGS YOU SHOULD AVOID DOING WHILE INVESTING IN STOCKS

STOCK investors must avoid indulging in following practices while investing to protect their investment from losing its value.

1. Make mistakes while filling the form – This is a very basic requirement of securing your allotment in IPO. Every time number of applications get rejected due to technical issues, the most popular reasons being error of incorrect form filling.

 

2. Borrowing money to invest – Even if the returns look very promising, one must be very careful about fundraising methods. Never borrow money to invest in IPOs as these avenues are highly risky and there is a possibility where all your money can vanish if the investment fails.

 

3. Getting influenced by advertisements and discounts – One must always bear in mind that a company that is issuing IPO along with its investment banks has put in a lot of money and effort into rolling out the IPO. They will try to leverage every opportunity and create a hype to create a demand for their IPO. Many times, investors also get misled with ads on social media and news apps. Hence, they should never get influenced by tall claims they make and never invest without studying the fundamentals of the company.

 

4. Making a decision based on price band – Many investors have burned their fingers in the past by investing heavily in a company just because the price band was below Rs. 100. Never judge a company with the price of the share. A company with a price band of 640-650 rupees per share can be much more profitable and valuable than the one with mere 60-70 rupees per share. The share price is influenced by the quality and creditworthiness of the company and how much investors are willing to pay.

 

5. You foresee the need for funds before 5 years and still investing– Equity as an asset class is highly volatile and risky and redeeming it in short term can be a costly affair. Hence, anyone looking forward to liquidating their investment within 5 years should refrain from investing in stocks as equities should be given sufficient time to cover multiple financial cycles involving market highs and lows to average out overall returns.

 

6. Do not get influenced by anyone but financial experts – A confused investor always has a tendency of reaching out to their friends and relatives for suggestions while making critical investment decisions. That happens irrespective of the knowledge and the level of understanding the friend has about the domain. It is as good as asking a truck driver, how to fly an airplane. Such advices in most cases are based on their individual experiences and hardly on calculations or facts and figures. Hence, instead of blindly following the financial advice of a random friend, investors must act wisely and take assistance of a well qualified financial planner who has sound knowledge about the domain.

 

 

WHAT ARE THE RISKS INVOLVED IN STOCKS?

STOCK investors should be mindful of following risks involved in this investment:

1. Currency Risk – Many companies having foreign clients or suppliers are exposed to foreign currency risk due to fluctuations in dollar rates. An increase or decrease in dollar rates has a direct impact on the company’s bottom line which affects the overall returns of its shareholders. Due to their exposure to foreign markets, such companies are more volatile and risky.

 

2. Market Risk – The price of shares is performance-driven and is largely influenced by various macro and microeconomic factors where we have almost no control. This makes this option highly volatile and so risky that its investors are exposed to a risk of losing their entire principal.

 

3. Liquidity Risk – Though money invested in equities can be withdrawn anytime, sometimes it is not financially viable to exit when the markets are on low. Doing so may lead to losses. Hence, one cannot rely on equities for their liquidity needs.

 

4. Concentration risk – Stock investing is exposed to concentration risk. The return on investment is largely influenced by the performance of one particular stock in which the investment is made. Hence, any sharp correction in the value of the stock can result in heavy losses for all its investors which may or may not be recovered. Hence, investors who are not technically sound with financial markets should take the mutual funds route to invest in equities.

 

 

HOW TO SELECT THE BEST STOCKS?

STOCK investors must follow the below instructions before signing up for the product to ensure the safety and growth of their investment.

1. Get to the roots of the company – Before investing, find out as much information possible about the track record and the past performance of the company. One should religiously study the financial statements of the company like profit and loss statement, cash flow statement and balance sheet. The company which is low on debt and high on operating income should be preferred. To find out all this information, one can always download and refer to DRHP (Draft red herring prospectus) from the SEBI website. Also, search on google if any frauds are being reported on the company or litigations pending against them.

 

2. Analyze performance – Performance is one of the most critical parameters to assess the worth of the company. How long the company has been in existence, where does it stand against its competitors in terms of market share, ROI, etc. If the company has been in business for a while and still failed to acquire a sizeable market share or generate minimum returns as per the industry standards and in comparison to fellow competitors then the reason for underperformance should not be ignored.

 

3. Know about the promoters of the company – Promoters are like the heart and brain of the company and they are the ones who run the show. It is very important to learn about their background like their qualifications, past performance, work experience, expertise in their line of business, a character like have they indulged in any unethical activity or do they have any criminal charge against them, etc. Also, their financial health should not be ignored.

 

4. Study the products or services they sell – Your returns from IPO will be influenced by the profits the company will make in the future. Hence, it is important that the product they are selling is in great demand and has a huge market share. E.g. In this computer age, a company selling typewriters will not have great demand and hence not scalable and should be avoided.

 

5. Innovation, marketing and technology – Are they in pace with their competitors? Are they using innovative marketing tactics to reduce the cost of operation? Do they have the latest technology to increase the efficiency of business operations? These are the questions one should ask about the company.

 

6. Study their competitors – Where does the company stand against their competitors in terms of profits, market share, turnover, etc. and whether they are better or worse then what are the reasons.

 

7. How strong is their client base – Having a great clientele is one of the strongest contributors to a company’s growth. Getting repeat orders from the same set of clients indicate that the company is successful in producing or procuring quality products at competitive rates and maintaining a healthy relationship with clients.

 

 

TAXATION RULES FOR STOCKS

Income earned from the sale of shares is termed as “Capital Gains”. These capital gains are taxable in your hands depending on how long you stayed invested. Such a period is called the “Holding Period”.

Capital gains earned on the holding period of up to 1 year are called “Short Term Capital Gains” (STCG). STCG is taxed at a rate of 15%.

Conversely, capital gains made after holding the stock for more than 1 year are called “Long Term Capital Gains”  (LTCG).  Owing to recent changes in budget 2019, LTCG up to Rs. 1,00,000/- in a financial year is tax-free, however, over Rs Rs. 1,00,000/- will be taxed at 10% without the benefit of indexation.

 

 

DOES ANY OTHER PRODUCT OFFER BETTER PROSPECTS THAN STOCKS?

STOCKS can be beaten by the following products on various grounds.

1. From a safety point of view – Since equity mutual funds offer diversification and professional services of the fund manager, they are comparatively safer. Also, it carries a relatively lower risk of loss of principal.

If someone is looking for even safer bet than then like , , , and are the best options.

 

2. From the returns point of view – Stocks generate superior returns across most of the asset classes as they leverage the equity market directly.

However, if someone is looking for diversifying their portfolio and have an appetite to invest in big-ticket investments, then they can consider investing in .

 

3. From a liquidity point of view – Though stocks do not have any lock-in period, accessing funds during emergencies can be a costly affair and withdrawing funds during unfavorable market conditions may result in losses. Hence, one should refrain from investing in equities if they anticipate any expenses which may trigger redemptions.

Instead, investing in , or other like ad can provide higher liquidity with more stable returns in the short term.

 

 

HOW TO INVEST AND DOCUMENTS NEEDED

• Open a Demat account. One cannot invest in IPO without having a Demat account.

• Fill up an application form of the IPO you want to invest in.

• Remember, that retail investors can only invest up to 2 lacs. In case, one wants to invest a higher amount then it has to be done under the HNI category. Hence, remember this while filling the form.

 

There are 2 ways of making an application.

1. Online – You can apply for an IPO through your broker’s website. This is the most convenient and time-saving method. However, one should note that not all IPO offers an online application facility. In such cases, one needs to take an offline route.

 

2. Offline – To apply offline, one can walk in the broker’s office with a valid pan card and latest address proof and fill a physical form.