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WhyneedIinvest?

ThebasicquestionWhyneedIinvest?meritsattentionbeforewemoveontothebquestionofwhyoneshouldinvestinshares.Simplyput,youwanttoinvestinordertocreatewealth.Whileinvestingisrelativelypainless,itsrewardsareplentiful.Tounderstandwhyyouneedtoinvest,youneedtorealisethatyoulosewhenyoujustsaveanddonotinvest.Thatisbecausethevalueoftherupeedecreaseseveryyearduetoinflation.Forexample,ifyouranahouseholdwithinabudgetofRs100,000in2000,torunthesamehouseholdtoday(assumingthesamesetofexpenses)youwouldprobablyneedRs125,000--that'sRs25,000addedtoyourbudgetbecauseofinflation!ThusyouneedtogenerateanadditionalRs25,000andthatcanbepossibleonlybyINFLATION:generalriseinpricesandwagescausedbyanincreaseinthemoneysupplyanddemandforgoods,andresultinginafallinthevalueofmoney.Inflationoccurswhenmostpricesrisebysomedegreeacrosstheeconomy.

INVESTINGmoney.

your

hard-earned

appreciationinthesharepricesasforthedividendstheircompaniespayout.Taxadvantages:sharesappearasthebestinvestmentoptionifyoualsoconsider

theunbeatabletaxbenefitsthattheyoffer.First,thedividendincomeistax-freeinthehandsofinvestors.Second,youarerequiredtopayonlya10%shorttermcapitalgainstaxontheprofitsmadefrominvestmentsinshares,ifyoubookyourprofitswithinayearofmakingthepurchase.Third,youdon'tneedtopayanylong-termcapitalgainstaxontheprofitsifyousellthesharesafterholdingthemforaperiodofoneyear.Thecapitalgainstaxrateismuchhigherforotherinvestmentinstruments:a30%short-termcapitalgainstax(assumingthatyoufallinthe30%taxbracket)anda10%long-termcapitalgainstax.Easyliquidity:sharescanalsobemadeliquidanytimefromanywhere(onsharekhan.comyoucansellashareattheclickofamousefromanywhereintheworld)andtheinvestmentscanberealisedinjusttwoworkingdays.Consideringthehighreturns,thetaxadvantagesandthehighlyliquidnature,sharesarethebestinvestmentoptiontocreatewealth.

RETURNSONDIFFERENTTYPESOFINVESTMENTBETWEEN1980AND2005

Sowhatarethevariousinvestmentoptions?

Onecaninvestinvariousfinancialinstrumentslikeequities(popularlyreferredtoasshares),bankfixeddeposits,NationalSavingsCertificatesetcaswellasingold,realestateetal.Outofthesesharesgivebestreturnoninvestment.

17%p.aBankFixedDeposits

StockMarket

Whyshares?

Historicallyshareshaveoutperformedalltheotherinvestmentinstrumentsandgiventhemaximumreturnsinthelongrun(seethetableonpage7).Inthetwenty-fiveyearperiodof1980-2005whiletheotherinstrumentshavebarelymanagedtogeneratereturnsataratehigherthantheinflationrate(7.10%),onanaverageshareshavegivenreturnsofabout17%inayearandthatdoesnoteventakeintoaccountthedividendincomefromthem.Werewetofactorinthedividendin

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comeaswell,theshareswouldhavegivenevenhigherreturnsduringthesameperiod.

9%p.aGold

5.7%p.aDuringthistimeInflationgrewat

7.1%p.a

*

*From1982to2005

Arethereanyotherbenefitsofinvestinginshares?

Source:DatacompiledfromtheRBIhandbookofStatistics,NCDEXDisclaimer:Investmentsinequityrelatedsecuritiesinvolvesahighdegreeofrisk.PleasereadtheRiskDisclosureDocumentasprescribedbySebibeforeinvesting.

Dividendincome:investmentsinsharesareattractiveasmuchforthe

6

1.WhymustIinvestinshares?

1.WhymustIinvestinshares?

HowdoIbuyandsellINTHISCHAPTER:InvestthroughprimaryandsecondarymarketsAbeginner'sguidetothestockmarketPlacinganordertobuy/sellshares

shares?2.HowdoIbuyandsellshares?

8

1.WhymustIinvestinshares?

9

FirstSteptoInvestingintheShareMarket

DIFFERENCEBETWEENPRIMARYANDSECONDARYMARKETSWhatarethedifferentwaysinwhichIcaninvestinshares?2)Tradeinthesecondarymarket,iestockexchangesOncetheofferpriceisfixedandthesharesareissuedtothepeople,stockexchangesfacilitatethetradi

ngofsharesforthegeneralpublic.Onceastockislistedonanexchange,peoplecanstarttradinginitsshares.Inastockexchangetheexistingshareholdersselltheirsharestoanyonewhoiswillingtobuythematapriceagreeabletobothparties.Individualscannotbuyorsellsharesinastockexchangedirectly,theyhavetoexecutetheirtransactionsthroughauthorisedmembersofthestockexchangewhoarealsocalledstockbrokers.Intheprimarymarketsecuritiesareissuedtothepublicandtheproceedsgototheissuingcompany.Secondarymarketisatermusedforstockexchanges,wherestocksareboughtandsoldaftertheyareissuedtothepublic.

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Therearebasicallytwowaysinwhichyoucaninvestinshares:1)Purchasesharesfromtheprimarymarket(ieIPOs)Thefirsttimethatacompanyssharesareissuedtothepublic,itisbyaprocesscalledtheinitialpublicoffering(IPO).InanIPOthecompanyoffloadsacertainpercentageofitstotalsharestothepublicatacertainprice.MostIPOsthesedaysdonothaveafixedofferprice.Insteadtheyfollowamethodcalledthebookbuildingprocess,wheretheofferpriceisplacedinabandorarangewiththehighestandthelowestvalue(refertothenewspaperclippingonthispage).Thepubliccanbidforthesharesatanypriceinthebandspecified.Oncethebidscomein,thecompanyevaluatesallthebidsanddecidesonanofferpriceinthatrange.Aftertheofferpriceisfixed,thecompanyeitherallotsitssharestothepeoplewhohadappliedforitssharesorreturnsthemtheirmoney.

EveryIPOhighlightsthepricebandaspartofthebook-buildingprocess

10

2.HowdoIbuyandsellshares?

2.HowdoIbuyandsellshares?

11

FirstSteptoInvestingintheShareMarket

Howdoesthestockmarketfunction?

Inordertounderstandhowthestockmarketoperates,youshouldhaveknowledgeabouttheroleoffollowinginstitutions/organistions:a.Stockexchanges,b.Brokers,c.Registrars,d.Depositoriesandtheirparticipants,ande.SecuritiesandExchangeBoardofIndia(Sebi)a.StockexchangesAstockexchangeisthemarketplacewherecompaniesarelistedandwherethetradinghappens.Therearedifferentstockexchangesinthecountry,thepre-dominantbeingtheNationalStockExchange(NSE)andtheBombayStockExchange(BSE).b.BrokersAstockexchangefunctionsthroughitsmemberscalledbrokers.Ifyouwanttobuyorsellashare,youcontactabroker.Eachstockexchangehasalimitedsetofbrokersandthesebrokerscontacteachotherusingtradingterminalstofindoutwhoisint

erestedintheshareyouwanttobuyorsell.Brokershave

terminalslinkedtotheBSEortheNSEandtheydirectlypurchaseorsellsharesusingtheseterminals.Theentiretransactionhappenselectronicallyorthroughwebsiteslikewww.sharekhan.com.Brokersmayalsoauthoriseasub-brokertoconductthetransactionsonbehalfofthem.Sincebrokersareprovidingaservicetheychargeyouforthesame.Normallythispaymentisnotaflatrate,butacommissionofthetransactionvalue.Brokeragesnormallyrangefrom0.5%to1%fordelivery-basedtransactionsandfrom0.10%to0.25%forintra-daytransactions.

c.RegistrarsTheregistrarforeachcompanymaintainsrecordsofalltheshareownersofthecompanyandthenumberofsharesthattheyown.Wheneveranownershipchangestakesplace,theregistrarupdatestheshareholdersdatabase.d.Depo

sitoriesandtheirparticipantsDepositoriesareorganisationsthatholdsharesofinvestors,onrequest,inelectronicformthrougharegistereddepositoryparticipant(DP).Itcanbecomparedwithabankasitholdssecuritiesinanaccount,transferssecuritiesbetweenaccountsontheinstructionoftheaccountholder,facilitatesthetransferofownershipwithouttheaccountholderneedingtohandlesecuritiesandmakesthesafekeepingofshareseasy.Theagentthroughwhichadepositoriesinterfaceswiththeinvestorisknownasadepositoryparticipant.YoucancreateademataccountwithaDP,whowillkeepanaccountofallthesharesyouown.Thisismuchlikethebankingsystem,whereyoujustcreateanaccountandhaveapassbookwhich

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PRIMERNSDL/CDSL:theNationalSecuritiesDepositoryLtd(NSDL)andtheCentralDepositorySecuritiesLtd(CDSL)arelikeBanksinthesensethattheymaintainrecordsofinward/outwardandholdingofsecuritiesmuchlikeBankshandlemoney.DP:depositoryparticipantsarelikebranchesofDepositoriesfacilitatingtransactionsprocessingfordepositories.

updatesyouonthemoneyyouownandthetransactionsyouhavemade.Inyourdemataccountyouownsharesinanelectronicformatandyouraccountgetsupdatedasyoubuyandsellshares.e.SebiTheregulatorybodythatgovernsallstockmarkettransactionsistheSecuritiesandExchangeBoardofIndia.Sebiformsruleandregulationsthatgoverntransactionsinsecuritiesmarketandthatthestockexchangesandotherintermediariesfollowallsuchrulesandregulationssetbyitand/orthegovernment.Sebialsolooksintoinvestorcomplaintsagainstcompanies.Itisquasi-judicialandcantrycasesandpassjudgmentsagainstanymarketparticipants.Italsolooksintomergersandacquisitionsofcompanies.