Everything about Equity markets

For many, investing means buying shares in the Stock Markets. You should be knowing that it isn’t the only place to invest, equities are a very important piece for any serious investor who wants to grow his wealth.

Let me first explain a few basic terms that you might hear when asking to invest in equity market.

Shares/Stocks: This is the first word that you might have heard. This means a “share” of a company. If you own a “share/stock” of a company, you are a part owner of the company. You can own any number of shares of a company (willing to sell its shares) if you can pay the cost for it.

DeMat Account: Just like your savings account holds your cash, a DeMat account will hold all your shares. Long time back, companies issued share certificate which was a piece of paper saying the holder own N number of shares. There was a risk of theft and if the certificate was burnt or torn, very hard getting it back. But now everything is stored electronically in your DeMaterialized Account. Also you can do transactions ultra fast.

Dividends: Profits earned by Companies are split amongst its investors based on the number of shares they hold. Usually companies announce one or more dividends every year based on its performance.

Share market/Stock Exchange: These shares can’t be sold or bought in the nearby groceries shop. There is a special marketplace called stock exchange where buyers and sellers meet and do their transactions. In India, there are three such exchanges where you can buy/sell company’s shares – The Bombay Stock Exchange(BSE), National Stock Exchange(NSE) and Multi Commodity Exchange (MCX).

SEBI: Securities and Exchange Board of India, is a regulatory authority who monitors the exchanges, brokers and investors. They have a set of rules and guidelines, which everyone must adhere to. Any problem that the investor has with their brokers or the company, they can complain to SEBI and they would take immediate action to rectify it. SEBI’s primary duty is to protect the investors by making things as transparent as possible.

Nifty and Sensex: You must have heard these terms used pretty often in news, especially like “Nifty has gone up”, “sensex has fallen”, etc. These is just a number that shows how the overall market has performed over a time period. It is what is called an “index”. If the index has fallen, it means most of the stocks in the market has decreased in value. If the index has risen, it means most of the stocks in the market has increased in value.

The reason I say “most of the stocks” is these indices are composed of many shares from a wide range of sectors like banking, infrastructure, IT, capital goods, engineering, automobiles, etc. Nifty tracks the value of 50 such companies and Sensex tracks the value of 30 companies. It shows up as a number whose calculation is based on the weightages of particular companies in the index.

There are other popular indices like Bankex, Bank Nifty, CNX IT, etc., but these two are the most popularly discussed index.

Stock Broker: A Broker is a third party who acts as your representative in the market whenever you want to buy or sell a stock. He charges a very small percentage of the transaction you make. Eg: if you bought something for Rs. 1000, he would charge maybe Rs. 5 as brokerage (just an example).

Scrip: This is a short form for the stock you are looking at. Eg: the stock of Infosys would be under the scrip name “INFY” and of State Bank of India would be called “SBIN”. Mostly you wouldn’t need to remember this as lot of sites allow you to search using the company name. Note: Do note that it is SCRIP and NOT Script.

Bullish/Bearish: When people say the market or a stock is bullish, they mean it is rising. When they say its bearish, they mean it is decreasing in value. Sometimes the market or index or stock can be in a bullish/bearish phase for several months together. Investing in the beginning of a bullish phase and selling before the bearish phase is the wisest thing to do. But even the most experienced investors can’t predict it accurately. 

How does the price of a stock increase or decrease:

This is confusing to many of the first time investors. Who determines how much to pay for a stock? Answer: the people in the market. It is based on the basic law of demand vs supply. For a quick explanation: Lets say you want to buy a stock of some company. You ask goto the exchange and ask if someone is willing to sell you 1 stock at Rs. 100. If you find someone willing to sell at that rate, then great. You just pay him the money and you get your stock (not that simple as it involves brokerage, etc). If there isn’t anyone to sell at Rs.100, you can see at what rate everyone are quoting and you find that the minimum price they are willing to sell it is Rs. 110. Not you can choose to either take up the offer (by paying Rs.110) or wait a little longer for someone to come in and sell at Rs. 100.

You and the other participants in the market are actually deciding what price to buy or sell a particular stock. Usually the last traded price is quoted on the exchange websites or your trading site to give an idea of the current going rate of the scrip. That will save you from quoting Rs. 100 for a stock which averages around Rs. 2000.

How does one start to invest?

It is pretty easy for anyone to begin investing. All it requires is a PAN card and some address proof. There are many brokers who can help you buy and sell shares. Most banks also act as brokers. You need to ask your broker/bank to open a DeMat account and trading account. If you use a bank, they will link your savings account with the trading account (and would call it a 3-in-1 account). Else your broker would have ways to transfer money into and out of your trading account.

There is a small charge you need to pay every year for maintaining your Demat account. Also there is a very small percentage of all your transactions that the broker takes called as “brokerage”. Usually you can negotiate your brokerage to a lower one. But as you are an investor, it doesn’t matter as the number of transactions you would be making would be very small. It doesn’t matter if you pay a couple of rupees extra.

It would take about a week or so to open all these. You can choose to trade online or through phone. Online is pretty easy and you could call for a demo in the broker office. You would be given a user ID, password and a transaction password and you should enter these every time you need to login to the system. A bit tiring, but if you buy once a month or even less, shouldn’t be much of a problem.

How to buy a stock

Buying a stock is quite easy. Once you know what company you are going to invest in, you call your broker or goto the online trading site and say you want to buy N shares of the company X at the current market price or at some fixed limit price. Eg: Buy 10 shares of HDFC Bank at Rs. 650. Buy 100 shares of INFY at the market price (which means buy at whatever rate the sellers are selling).

However this is just the technicality. What is more important is the part you need to do before buying the stock: identifying the company, understanding its business, analyzing its financial status, calculating a value for it now and in the future, etc. A lot of things need to be considered before you even go to the broker to give your buy order.

I just bought a stock, it doesn’t show up in my Demat account yet

Even though all transactions are done electronically, it would take 2 more working days for you to see the stock you bought today. It is called T+2 days settlement (T is the transaction date). Similarly when you sell, you would get the money 2 days after you sold it.

How to sell a stock

Selling is also very similar to buying. Except you can only sell something you have bought earlier (Not entirely true, yes you can sell without owning a stock). But for an investor, selling means, selling your stocks which you have in your Demat account. Hopefully you would be making a profit by selling, by selling it at a much higher rate than you bought it for.

Selling can be done during the following three cases:

1. You need back the money you put in and would like to get it back immediately. You don’t want it to grow to multi-millions and are contented with what you got now.
2. You bought at a low price and now sitting at on a nice profit (paper profit, till you sell it and get the money in your bank account). You realise that the stock has reached a peak or plateau and there is nowhere else for it to go than down. There can be various reasons for it – maybe the technology is obsolete or the management has rotted the place.
   So you book your profits and get out before the others drag you down.
3. You bought it at a high price and now the stock is selling at a much lower price. You want to get out of the stock trying to save as much as possible. You want to cut your losses (which is very important incase you chose the wrong company). This is called stop-loss and is very important for traders. Investors generally don’t have to worry about it as long as the company they chose is good.

This shows you how to make profit. “Buy low, sell high”. Simple. Thats it. You buy something for low and sell it for a higher price and pocket the difference. Eg: You bought State Bank of India for Rs. 1000, five years back. You sold it for Rs. 2000. Your profit: Rs.1000. See how I said 5 years and not 5 days.

Thats how it works. It takes a long time to earn significant profits. You can’t become a millionaire in a week. Don’t believe if someone says so.

What to buy/sell and when to buy/sell

Always remember this rule. “You need to decide what to buy/sell and when to buy/sell. Not someone else.”

Whatever decision you make in the stock market will affect you and your money. There will be many who will suggest you companies to buy because they heard some rumour. Or saying it looks cheap. Whatever you hear, remember the company you choose should be your decision. No one else will be affected if you lose your money.

Remember investing in equities is one of the most riskiest way you can put your money in some place. If you are willing to take the risk, you will be rewarded handsomely.

Tomorrow I will post on how to put your money in a scrip which has the least risk of erasing your wealth and at the same time returning returns which mimic the market’s returns.