things to know before one invest in equity market

8/10/2019 Things to Know Before One Invest in Equity Market

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THINGS TO KNOW BEFORE ONE INVEST

IN EQUITY MARKET


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HOW DOES AN INVESTOR IN EQUITIES MAKE

MONEY

Investors get returns on their investments in

two ways

Dividends

Capital Gains


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EARNING THROUGH DIVIDENDS

Dividends may be in the form of cash, stock orproperty. Most secure and stable companiesoffer dividends to their stockholders. Their shareprices might not move much, but the dividend

attempts to make up for this.

High-growth companies rarely offer dividendsbecause all of their profits are reinvested to help

sustain higher-than-average growth.


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EARNING THROUGH CAPITAL GAINS

Say, you invested Rs.10,000 by buying 100

shares of X company at a price of Rs.50 and

sold all the 100 shares later at a price of

Rs.100, you would have made a capital gainof Rs.5000.

Sale value of Shares (Rs.100 x 100) Rs.10,000

Value of original investment (Rs.50 x

100)

Rs.5,000

Capital gain Rs.5,000


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WHY DO STOCK PRICES MOVE UP AND

DOWN

The market price of a particular share is

dependent on the supply and demand for

that particular company.

Fluctuations in a stock's price occur partly

because of companies performance also

its decisions & Market Sentiment.

Money supply may also affect stock prices.

Publicity also affects stock prices.


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WHAT TOOLS ARE USED FOR STOCK

ANALYSIS AND FORECASTING

The behavior of the price movement of a

stock is said to predict its future movement.

One such approach is called technical

analysisand is based on the historicalmovements of the individual stocks as well

as the indices.

" fundamental analys is", where theforecasting is done on the basis of economic,

industry and company data.


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WHAT ARE EQUITY MARKETS

Equity Markets have two segmentsPrimaryand Secondary markets. New issues are floatedin the primary market and outstanding issuesare traded in the secondary market

There are 3 ways a company can raise capitalin the Primary Market: Public Issue: Sale of fresh securities to the public.

Rights Issue: This is a method of raising capital

existing shareholders by offering additional securitiesto them on a pre-emptive basis.

Private Placement: Issuers make direct sales toinvestor groups


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WHAT ARE BONUS ISSUES

Bonus shares are issued in a certain

proportion to the existing holders. A 2 for 1

bonus would mean you get two additional

shares free of cost for the one shareyou hold in the company.If you hold 100

shares of a company and a 2:1 bonus offer is

declared, you get 200 shares free. Thatmeans your total holding of shares in that

company will now be 300 instead of 100 at

no cost to you.


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WHAT ARE THE EFFECTS OF A BONUS

ISSUE

Bonus shares do not directly affect a companysperformance. Bonus issue has following majoreffects.

1. Share capital gets increased according to the bonus

issue ratio.2. . Liquidity in the stock increases.

3. Effective Earnings per share, Book Value and otherper share values stand reduced.

4. Markets take the action usually as a favorable act.5. Accumulated profits get reduced.

6. A bonus issue is taken as a sign of the good healthof the company.


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WILL THE SHARE PRICE CHANGE AFTER

BONUS ISSUE

- A bonus issue adds to the total number of

shares in the market.

- Say a company had 10 million shares. Now,

with a bonus issue of 2:1, there will be 20 millionshares issues. So now, there will be 30 million

shares.

- This is referred to as a dilution in equity. Nowthe earnings of the company will have to be

divided by that many more shares.(Earnings

Per Share = Net Profit/ Number of Shares)


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Thats because:

i. The stock is now more liquid. Now that there

are so many more shares, it is easier to buy and

sell.

ii. A bonus issue is a signal that the company is

in a position to service its larger equity. What it

means is that the management would not havegiven these shares if it was not confident of

being able to increase its profits and distribute

dividends on all these shares in the future.


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WHAT ARE STOCK SPLIT

A corporate action in which a company dividesits existing shares into multiple shares.

The number of shares outstanding increases by

a specific multiple, the rupee value of the sharesremains the same compared to pre-splitamounts.

The split did not add any real value. The most

common split ratios are 2-for-1 or 3-for-1, whichmeans that the stockholder will have two orthree shares for every share held earlier.

Also known as a "forward stock split."


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WILL THE SHARE PRICE CHANGE AFTER

STOCK SPLIT

The stock price will be reduced since the

number of shares outstanding has increased.

Stock split provides a signal to the market

that the company's share price has been

increasing and people assume this growth

will continue in the future, and again, lift

demand and prices.


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HOW DOES INFLATION AFFECT THE EQUITY

SHARE PRICE

Inflation represents one of the major threats to stockinvestors, many industries wait for the response ofthe RBI for tactics of combating inflation

One of the alternatives is to increase interest rates,

but then it becomes expensive for the companies toborrow money, their borrowing costs increase andexpansion plans are stopped

The globalization of the market may lead to loss of

competitiveness of companies that compete in theglobal arena Since inflation rates are not the same inforeign countries the rise will not be reflected in theprices of foreign goods.


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TAXATION

Dividend received from investment in shares is

not taxable in the hands of the recipient.

The Securities Transaction Tax provides for a

levy of a transaction tax on the value of certaintransactions. These transactions include the

purchase and sale of equity shares in a

company. long-term capital gain shall be taxed at 20 per

cent of indexed cost and short-term capital gain

shall be indexed at the normal rate of taxation.


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TAXATION

In case of shares, which are not transacted through arecognized stock exchange and on which STT hasnot been paid, the law prior to October 1, 2004 wouldcontinue to be applicable.

Investments in shares do not have any wealth taximplications.

Investments in shares do not have any gift taximplications.

Non-Resident Indians are subject to lower rates oftaxation. They have an option either to choose thelower rate of tax on the capital gains or to choose thenormal rate of tax if they want the cost to be indexed.

things to know before one invest in equity market

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