Types of Savings and Investment
The next type of investment that we will discuss here is stock investing which is quite different from other investment schemes that we have discussed earlier. Investing in stocks comes with its own set of risks and rewards. So, let us first understand the concept of a share/ stock/ equity.
A share is a unit of ownership of a company. Shareholders are a part of the ownership of the company and if the company grows, they also grow. Shareholders are also entitled to receive dividends. Dividend is a part of the company’s profit which is distributed by it. The company may distribute the profit or it may retain it back for further expansion of the company.
A shareholder earns Capital Gains or incurs Capital Losses. One earns capital gain by selling the share at a higher price than what it was bought at. A person incurs capital loss if he sells the share at a price lower than what he had bought it at.
The main motive behind investing in share markets is to make capital gains. Equity is the most risky asset class but it offers the highest returns. One can either invest / trade in the stock market directly by himself or indirectly through mutual funds.
Investing involves buying fundamentally sound companies for a long period of time. Trading involves buying and selling of shares in a very short span of time so as to earn quick profits. Trading is a risky activity. Investing in mutual fund entails less risk because of a diversified portfolio.
How to start investing/trading in shares?
Trading is done through stock exchanges. There are two stock exchanges in India–
National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). One needs to open a DEMAT account first. The Demat Account stores the shares in an electronic format. There are two depositories in India – National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).
One needs to visit a share broker and get the trading and demat account opened. Documents such as Aadhaar Card, PAN Card, any other identity proof are required along with passport size photographs to open trading and demat account with the broker. One can opt for brokers like HDFC Securities, ICICI Securities, IIFL or any other company depending on which broker suits them the best.
There is a capital gains tax of 15% if one sells a stock within a year. There is a tax of 10% on the gains exceeding ₹1 lakh if a stock is sold after holding it for more than a year.
Dividends earned from the stocks in a year are not taxable up to ₹10 lakh, in the hands of the investor. Dividends above ₹10 lakh are taxable at the rate of 10%.
A 0.1% tax called STT (Security Transaction Tax) is imposed on the value of each stock in case of delivery of shares (whether buying or selling). In case of intraday transactions, 0.025% tax is charged at the time of selling only. STT is deducted by the stockbroker.
Risk associated with equities
Capital is not protected when investing in the share market. The share market does not give any guaranteed returns as well. However, stocks are capable of beating inflation if one can hold the investment for a long term. Stocks are quite liquid as well. There is no lock-in period. One can sell shares and get the money in 2 working days.