You do not need a big amount of investment to start investing in stock market.
I recently have started to learn about personal finance; it’s definitely fun to realize those minute mistakes and habits that can lead to big savings and early retirement. As a first step, I planned to make myself aware of the nits and bits of the financial markets revolving around stocks, shares, brokers etc.
I came across How To Start Investing With Rs. 5000 which I found very informative for someone wanting to quicly understand the terms and the flow. This notes arouse in me the curiosity to start the Basics of Financial Markets provided by elearnmarkets.com. What follows in this write up are the notes from the same.
NOTE: If you are here aiming at learning about stock trading, I would highly suggest going through the ebook which I have annotated. It’ll be more helpful to go through this writeup after you’ve read the ebook. It is expected that the readers have knowledge of basic financial terms such as investment, loss, gain, etc.
- Important to understand that loss and gain both exist.
- A good amount of research is required to make money from stocks.
- Starting with a small investment and then growing is wiser.
- With experience and understanding, we can increase the investment amount.
What Is A Stock Market
- A stock Market is a marketplace where we buy and sell shares.
- Buying and selling shares happens through brokers.
- Every broker has varying charges, platform fees, etc. It is important to look for the right services and corresponding charges when choosing a broker.
An Overview Of The Indian Stock Markets
- There are two stock exchanges in India - National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
- 80% of the trading happens through NSE and BSE.
- The markets work for 5 days a week from Monday to Friday, barring national holidays.
- Trading system of BSE is BOLT (BSE Online Trading) and NSE is NEAT (National Exchange Automated Trading).
- Market indices are parameters that help us gauge the market situation.
- S&P BSE Sensex is the primary index of BSE consisting of 30 stocks.
- NIFTY 50 is the primary index of NSE consisting of 50 stocks.
- Indices are calculated based on the market capitalization and only include free floating shares.
Securities and Exchange Board of India (SEBI) is the main regulator.
What Are Shares or Stocks
- To avoid taking loans, companies issue shares to public (or private) to raise money.
- A share issue involves selling a part of the company.
- By investing money in shares. we get ownership of the company entitling us to profit dividends.
- We can also gain from capital appreciation, i.e. selling the share at a higher price.
Pre-requisites For Trading In India
- Following essentials are required to trade shares in India
Permanent Account Number (PAN) Card
- Bank Account
- Demat Account
- Trading Account
- Demat account holds all our shares and securities.
- Trading account is required for buying and selling shares.
- Very often most of the process is taken care of by the brokers.
How To Select A Broker
- Selecting a good broker is important since all services are availed from them.
- Following key points are helpful:
- check customer reviews
- types of investment options offered
- quality of website and services
- extra services offered
- Other major investment instruments include mutual funds, futures and options.
- The availbility of services and minimum technical faults contribute towards quality.
- Extra service may include providing advise, keeping us updated with latest news, etc.
- Full-service brokers provide advise at every step, discount brokers just execute orders.
Understanding Online Trading Platforms
- Trade using internet on the platform by the broker.
- Basic features of the platform:
- view balance in bank and demat accounts
- access to tools for technical analysis of stocks
- control portfolio
- trade on NSE and BSE
- updates and news about market
- no significant delay between actions
- Market watch screen gives realtime updates such as last traded price, best bid, offer rate, etc.
- Customize market watch screen to track stocks of interest.
- Market watch screen may seem intimidating in the beginning but becomes easy with use.
- Charting facility is helpful in visualising the change over a chosen period of time.
- Reports can be accessed for trade book, order book, net positions, margin, etc.
- Market analyser - showing top traded, top gain, top losers, etc. is helpful in getting insights and identifying top trades.
Buying And Selling Shares Using Different Types of Orders
- Limit orders allow setting the price at which we want to buy the shares.
- Market orders get executed at the current price of the market.
- Stop loss orders are placed in pairs; first a market or limit order and then a stop loss order to restrict maximum loss.
For example, if you place an order to buy a stock at Rs. 100 and do not wish to take a loss more than Rs. 2, then you can place a stop loss order to sell the share at 98
- Immediate Or Cancel (IOC) orders get executed immediately or are cancelled.
- IOC may get partially executed and partially cancelled.
- IOC orders cannot be used in stop loss orders.
- Accepted orders can be modified before execution.
- Setting “Disclosed Quantity” processed the order in batches; it can be set to a minimum of 10% of the quantity.
- It is vital to learn to read financial statements and invest only in financially or fundamentally strong companies.
- External indicators such as changes in government policies, company’s management changes, etc. affect stock prices.
Earnings per share (EPS) indicates the profits that the company made in the last year per share; a higher EPS is considered good. If EPS is growing in the past few years, it is a good sign.
EPS = Net profits (after deducting the dividends paid to preference shareholder) / equity shares issued in the market.
- A high price to earnings (P/E) ratio shows that the stock is overvalued, hence a lower is good.
Price to earnings ratio = Price per share / earnings per share
- A lower price to book ratio indicates that the stock is undervalued.
Price to book ratio = price per share / book value per share
- A debt to equity ratio lesser than 1 is considered good.
Debt to equity ratio = total liabilities / shareholder's equity
- A current ratio greater than 1 is considerd a good sign.
Current ratio = Current assets / Current liabilities
- Price to sales ratio is more reliable and a high one is more sought after.
Price to sales ratio = Price per share / annual sales per share
Return on equity (ROE) determines how good the company is at rewarding the shareholders; in general an ROE greater than 20% for past three years is good.
Return on equity = Net income / average shareholder equity
- Dividend yield shows the dividend yield compared to current market price; a higher dividend yield is considered good.
Dividend yield = Dividend per share / price per share
Cost Associated With Brokerage
- Cost associated with the buying and selling of shares is called brokerage.
- Usually effective cost differs from what most brokers mention, “0.05% for the intraday trades and 0.50% for delivery”.
In intraday trading you buy and sell shares on the same day, and earn a profit or loss from the difference.
In delivery trading position is not closed on the same day and the shares are stored in demat account.
- Cost for intraday is generally lower than delivery.
- The trading cost in India includes the following:
- Brokerage charged on agreed percentage of the total cost of shares bought and sold.
- Services tax is charged at 15% of the brokerage charges ONLY.
- Securities Transaction Tax is 0.1% of total transaction cost of buying and selling delivery and 0.25% of total cost of selling intraday shares.
- Transactions charges are 0.00325% of amount for NSE and 0.00275% for BSE.
- Stamp duty charged by the respective state governments.
- SEBI turnover charges of 0.0002% of the total amount.
- A small flat fee, Rs. 10 to Rs. 35, is charged by depository for storing delivery shares.
There are two major depositories in India, National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).
- It is important to keep reviewing the charges which may also include annual platform and maintenance charges by the broker.
- Two types of capital gains tax: short-term and long-term.
- Selling a share after a period of one year is considered long-term, otherwise short-term.
- There are no capital gain taxes on long-term shares and hence it is more beneficial.
- For short-term, a flat rate of 15% (irrespective of the tax slab) is charged on the gain for delivery shares.
- In case of intraday trading, investors need to pay according to their tax slabs.
After careful assessment of my goals and efforts (in terms of knowledge and time) required for directly investing and trading in shares, I’ve decided I’d prefer to stick with Mutual funds. However, I would be going forward with learning more about the financial markets, how economies work, etc. I believe these are basic stones to build strong personal finance foundations and be better at managing our money