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Investing in equities

Source : SIFY
Last Updated: Wed, Nov 18, 2009 10:48 hrs

Probably the most widely talked and most often talked about avenue for investment is the investment in equity shares. There are close to 1 crore demat accounts in India. The number of people who have physical shares that are yet to be converted to the demat format will add to the number of equity investors considerably.

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All the discussion and the ease of access to the stock market add a lot of charm to this avenue of investment. However, people have also lost their careers and sometimes their lives itself, because of losses in the stock market. Let us now look at this investment avenue in detail.

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Current Income

Current income from equity shares is low relative to their market prices. The income has to come from the dividend. The dividend is declared as a percentage of the face value or now-a-days as rupees per share. In majority of the cases in India, the market price is far higher than the face value of the share.

For example, Reliance Industries had recently declared a dividend of Rs 13 per share. The closing market price as on October 11, 2009, was Rs 2162. The dividend yield thus works out to only 0.6% of the market value.It is not prudent for an investor to invest in a share for its dividend income.

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Capital Appreciation

This is the main reason for the investment in shares. Historically shares have given among the best returns across the world. The inherent reason is that there is a sincere productive economic activity in businesses. This leads to growth. The growth automatically gets reflected in the price of the shares of the company.

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Let us use the Sensex (an index for the stock market) for calculating the returns. This prevents bias/preference to any particular company and also gives us a long-term perspective quite easily. The Sensex started at 100 in 1979. Today (11-October-2009) after going through all the rising and tumbling, the Sensex is at 17,026. This translates to a return of 18.68% compounded annually.

Individual stocks may have performed better or worse. But for the long-term investment, shares are a convenient and safe bet.

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Risk

Investment in shares in the short term is a strict no-no. This is because the changes in the share prices in the short term (2 to 3 years) can be drastic in the upward and the downward directions. So if we have a commitment, say a daughter's college fees to be paid or a house to be bought, the next year the share market is not the place to invest in.

Bank deposits as an investment avenue

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Copyright 2008 www.BankBazaar.com. All rights reserved.

 

However, if it is a young man's investment for pension or a one-year-old child's college education fund that we are planning for, the share market is the right place to be in.

Investing in a company's share is equal to becoming a part of the business. So the investment has to be thought out in all details before investment. Also as in any business monitoring has to be done regularly to profit from it.

Liquidity

Shares score high in terms of the liquidity. From the date that we put in a sell order, the cash will be credited in 2 days to our bank account.

With the Demat (dematerialised format) system, fully in place, there is no worry about the shares getting lost or stolen or damaged. We can also access our account from around the world and round the clock. Remember to ask your broker for the online trading account to go with the demat account.

Tax Treatment

In the tax front too, shares are very attractive. The long-term capital gains tax is zero if we hold on to the shares for over 365 days (1 year) from the date of purchase. The short-term capital gains are taxed at 10% of the gains. The dividend distribution tax is paid by the company hence as investors we do not have to pay it from our pockets.

Convenience

Being in the demat system, investing in shares is very convenient. However, for diversification of risk, we need to invest in about 8 different shares in different sectors (This is a thumb rule for individual investors). This will require quite a considerable amount of money. The analysis of shares (companies) to choose one to invest in is a complex process that requires time, knowledge and vast resources. This is not available to all investors.

Summary

Though a risky investment in the short term, shares give one of the best returns in the long term. Also the easy access and high liquidity makes it the choice for investment for many. The investment is also very tax friendly.

The caution is not to go for too much of trading. There is a very thin line between profit and loss in the stock market. This line is controlled by the human emotion - greed. So knowing ourselves better is a prerequisite to investment in stocks.

Bank deposits as an investment avenue

BankBazaar.com is an online marketplace where you can instantly get loan rate quotes, compare and apply online for your personal loan, home loan , car loan and credit card from India's leading banks and NBFCs.

Copyright 2008 www.BankBazaar.com. All rights reserved.




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