Share-Market-Beginners-Guide.pdf

fiirst step to investing in the f

share

market W

hy should I put my hard earned money into shares when I am not sure of a return? If there’s a science to investing then why do we call investing a risk? And if it’s not a risk, then why do people end up losing money from their investments in shares? In this booklet we have tried to answer the questions you might have about investing in shares. When is investing in shares a risk and when does it become a science? How can you be assured that your investment in shares is safe? And more… More importantly, we’ve tried to explain some basic concepts that most investors take for granted but that are crucial knowledge for a person just entering into the financial financ ial jungle. So concepts like risk premium, dividend, stock split etc have been explained in a simple manner for the benefit of the first-timers. Not only that this handy booklet also seeks to educate the would-be investors in the various

W

hy should I put my hard earned money into shares when I am not sure of a return? If there’s a science to investing then why do we call investing a risk? And if it’s not a risk, then why do people end up losing money from their investments in shares? In this booklet we have tried to answer the questions you might have about investing in shares. When is investing in shares a risk and when does it become a science? How can you be assured that your investment in shares is safe? And more… More importantly, we’ve tried to explain some basic concepts that most investors take for granted but that are crucial knowledge for a person just entering into the financial financ ial jungle. So concepts like risk premium, dividend, stock split etc have been explained in a simple manner for the benefit of the first-timers. Not only that this handy booklet also seeks to educate the would-be investors in the various aspects of share trading, both offline and online. We hope the booklet shall succeed in satisfying your desire for knowledge of the share market as well as in lending you a helping hand as you take your FIRST STEP into the world of investing.

Tarun Shah CEO — Sharekhan Sharekhan

1

CONTENTS CON TENTS

5

1: Why must I invest in shares?

 Invest to create wealth  Shares—the best investment option  Benefits of share investing are many

9 2: How do I buy and sell shares? 

Invest through primary and secondary markets  A beginner's guide to the stock market  Placing an order to buy and sell shares

21 3: How do I select the right shares?

Science of investing in shares Components of fundamental research  Learning to judge an IPO  

29

W

hy should I put my hard earned money into shares when I am not sure of a return? If there’s a science to investing then why do we call investing a risk? And if it’s not a risk, then why do people end up losing money from their investments in shares? In this booklet we have tried to answer the questions you might have about investing in shares. When is investing in shares a risk and when does it become a science? How can you be assured that your investment in shares is safe? And more… More importantly, we’ve tried to explain some basic concepts that most investors take for granted but that are crucial knowledge for a person just entering into the financial financ ial jungle. So concepts like risk premium, dividend, stock split etc have been explained in a simple manner for the benefit of the first-timers. Not only that this handy booklet also seeks to educate the would-be investors in the various aspects of share trading, both offline and online. We hope the booklet shall succeed in satisfying your desire for knowledge of the share market as well as in lending you a helping hand as you take your FIRST STEP into the world of investing.

Tarun Shah CEO — Sharekhan Sharekhan

1

CONTENTS CON TENTS

5







29

CONTENTS CON TENTS

5







29 4: How can I minimise risks and maximise returns? 

Types of risk involved in investing in shares  Reducing risk  Become a successful investor

37 5: How can I benefit from online trading? Using your computer to trade Trading online is convenient  Benefits of trading on sharekhan.com  

PLUS 8 pages of trading jargon

3

First Step to Investing in the Share Market

Why must


Why must I invest

This booklet is distributed as part of the Sharekhan First Step to Investing Program. It is meant for private circulation ONLY and is not for sale. First Step to Investing in the Share Market is meant to introduce new investors to the stock market. It is not intended to be taken as the basis for an investment decision!

4

in shares? IN THIS CHAPTER:  Invest

to create wealth best investment option  Benefits of share investing are many  Shares—the

1. Why must I invest in shares?

5


OPENING AN ACCOUNT WITH SHAREKHAN

Shares are the best investment option for individual investors

How do I buy and sell


OPENING AN ACCOUNT WITH SHAREKHAN

Shares are the best investment option for individual investors due to the following benefits: 1) Possibility of high returns 2) Easy liquidity 3) Unbeatable tax benefits 4) Income from dividends

How do I buy and sell

shares?

IN THIS CHAPTER:

Invest through primary and secondary markets A beginner's guide to the stock market  Placing an order to buy/sell shares  

8

2. How do I buy and sell shares?

1. Why must I invest in shares?


DIFFERENCE BETWEEN PRIMARY AND SECONDARY MARKETS

What are the different ways in which I can invest in shares? There are basically two ways in which you can invest in shares: 1) Purchase shares from the primary market (ie IPOs) The first time that a company’s shares are issued to the public, it is by a process called the initial public offering (IPO). In an IPO the company offloads a certain percentage of its total shares to the public at a certain price. Most IPOs these days do not have a fixed offer price. Instead they follow a method called the bookbuilding process, where the offer price is placed in a band or a range with the highest and the lowest value (refer to the newspaper clipping on this page). The public can bid for the

2) Trade in the secondary market, ie stock exchanges Once the offer price is fixed and the shares are issued to the people, stock exchanges facilitate the trading of shares for the general public. Once a stock is listed on an exchange, people can start trading in its shares. In a stock exchange the existing shareholders sell their shares to anyone who is willing to buy them at a price agreeable to both parties. Individuals cannot buy or sell shares in a stock exchange directly, they have to execute their transactions through authorised members of the stock exchange who are also called stock brokers.

In the primary market securities are issued to the public and the proceeds go to the issuing company. Secondary market is a term used for stock exchanges, where stocks are bought and sold after they are issued to the public.

9


DIFFERENCE BETWEEN PRIMARY AND SECONDARY MARKETS

What are the different ways in which I can invest in shares? There are basically two ways in which you can invest in shares: 1) Purchase shares from the primary market (ie IPOs) The first time that a company’s shares are issued to the public, it is by a process called the initial public offering (IPO). In an IPO the company offloads a certain percentage of its total shares to the public at a certain price. Most IPOs these days do not have a fixed offer price. Instead they follow a method called the bookbuilding process, where the offer price is placed in a band or a range with the highest and the lowest value (refer to the newspaper clipping on this page). The public can bid for the shares at any price in the band specified. Once the bids come in, the company evaluates all the bids and decides on an offer price in that range. After the offer price is fixed, the company either allots its shares to the people who had applied for its shares or returns them their money.

2) Trade in the secondary market, ie stock exchanges Once the offer price is fixed and the shares are issued to the people, stock exchanges facilitate the trading of shares for the general public. Once a stock is listed on an exchange, people can start trading in its shares. In a stock exchange the existing shareholders sell their shares to anyone who is willing to buy them at a price agreeable to both parties. Individuals cannot buy or sell shares in a stock exchange directly, they have to execute their transactions through authorised members of the stock exchange who are also called stock brokers.

In the primary market securities are issued to the public and the proceeds go to the issuing company. Secondary market is a term used for stock exchanges, where stocks are bought and sold after they are issued to the public.

Every IPO highlights the price band as part of the book-building process

10



11


a price higher than the purchase price and if this sale is within a year of the purchase, then a 10% capital gains tax is levied on the profit that you make. For example, if you bought a share for Rs100 on January 1, 2005 and sold it for Rs150 on July 1, 2005, then you have to pay a tax of 10% on the Rs50 profit that you make. If you sell after a year of purchase, there is no tax on the long-term gains. b. Securities transaction tax Securities transaction tax (STT) is levied by the government on every transaction you do on a stock exchange. You don’t have to pay this separately; it’s collected by your broker. As per the Union Budget 2005 the STT will be 0.10% on delivery-based transactions and 0.02% on intra-day transactions.

trade that they do for you. This commission varies from broker to broker; at sharekhan.com the brokerage is 0.5% for delivery-based transactions and 0.10% for intraday transactions. On the brokerage amount you are required to pay a service tax to the government (to be collected by the broker). The brokerage varies depending on the service that the broker provides you. Some brokers, such as Sharekhan, offer its clients regular updates on companies, multiple means to transact and customer service support. d. Depository fees Since most of the shares exist in a dematerialised form, every time you buy or sell shares the transactions are being noted by your DP. The DPs normally levy a charge which is an annual charge or a charge on

How do I

l t th


a price higher than the purchase price and if this sale is within a year of the purchase, then a 10% capital gains tax is levied on the profit that you make. For example, if you bought a share for Rs100 on January 1, 2005 and sold it for Rs150 on July 1, 2005, then you have to pay a tax of 10% on the Rs50 profit that you make. If you sell after a year of purchase, there is no tax on the long-term gains. b. Securities transaction tax Securities transaction tax (STT) is levied by the government on every transaction you do on a stock exchange. You don’t have to pay this separately; it’s collected by your broker. As per the Union Budget 2005 the STT will be 0.10% on delivery-based transactions and 0.02% on intra-day transactions.

trade that they do for you. This commission varies from broker to broker; at sharekhan.com the brokerage is 0.5% for delivery-based transactions and 0.10% for intraday transactions. On the brokerage amount you are required to pay a service tax to the government (to be collected by the broker). The brokerage varies depending on the service that the broker provides you. Some brokers, such as Sharekhan, offer its clients regular updates on companies, multiple means to transact and customer service support. d. Depository fees Since most of the shares exist in a dematerialised form, every time you buy or sell shares the transactions are being noted by your DP. The DPs normally levy a charge which is an annual charge or a charge on each transaction.

c. Brokerage Brokers get a commission on every

You can either apply for shares through an IPO or trade in shares in the stock market. To buy/sell shares in the stock exchange, investors have to go through brokers. Sebi is the regulatory body for the stock market. It protects investors and also handles their complaints against companies. Investing in stocks can provide you with two types of gains: appreciation in stock price and dividends. To calculate returns, you must also be aware of transaction taxes and other charges like brokerages etc. Sensex and Nifty are some of the key indices you can use to track the overall stock market movement. 20


How do I select the

right shares? IN THIS CHAPTER: Science of investing in shares Components of fundamental research  Learning to judge an IPO  

3. How do I select the right shares?

21


A) Income: the total earnings of the company from varied sources. This can include sales, income from dividends, interest received, profit from asset sales, stock variation (which refers to the closing stock in inventory) and so on. However attention should be paid to the Sales figure, which pertains to the core business of the company.

A

B

C D A typical Profit and Loss Stat ement is divided into

B) Expenditure: the actual three sections: Income, expenditure and profitability money spent on operational expenses (like raw material ii. The Balance Sheet consumed, labour costs etc). The The Balance Sheet gives you an Other expenses are interest on serv- insight into the assets of the comicing a debt, depreciation etc. pany, its existing liabilities and how C) Operating profit (popularly referred to as EBIDTA): deducting Operational expenses Sales

its funds are utilised. It can also contain the details of the sources of the funds (equity capital, reserves, debt etc).


A) Income: the total earnings of the company from varied sources. This can include sales, income from dividends, interest received, profit from asset sales, stock variation (which refers to the closing stock in inventory) and so on. However attention should be paid to the Sales figure, which pertains to the core business of the company.

A

B

C D A typical Profit and Loss Stat ement is divided into

B) Expenditure: the actual three sections: Income, expenditure and profitability money spent on operational expenses (like raw material ii. The Balance Sheet consumed, labour costs etc). The The Balance Sheet gives you an Other expenses are interest on serv- insight into the assets of the comicing a debt, depreciation etc. pany, its existing liabilities and how C) Operating profit (popularly referred to as EBIDTA): deducting Operational expenses from Sales gives you the Operating profit. D) Net profit: after deducting interest cost, depreciation cost and taxes from Operating profit you get the profit after tax or the Net profit. Sometimes one-off or non-recurring items such as the sale of land or investments may boost a company’s net profit. Investors need to assess whether the profit is driven by core operation and is sustainable.

24


its funds are utilised. It can also contain the details of the sources of the funds (equity capital, reserves, debt etc).

How do ratios help in fundamental analysis? Using the data from the annual report and ratios like EPS and PER, it is possible for you to judge the financial health of a company. i. EPS: earnings per share—this ratio reflects how much the company is earning per share that it has distributed. The EPS is calculated as the total net profit divided by the total


25

How can I

How can I

minimise risks and maximise returns? IN THIS CHAPTER: Types of risk involved in investing in shares Reducing risk  Become a successful investor  

4. How can I minimise risks and maximise returns?

29



36


and then do the evaluation. Thus if WHAT FOOLISH INVESTORS DO an investment in a company is PART IV expected to provide 50% returns SKIMP ON RESEARCH with almost a 75% probability, this would be much better than a safe One of the investment with returns of just main reasons why people 10%. lose money in Again even within stocks if one the stock marstock provides higher returns with a ket is because higher risk and another provides they invest on the basis of rumours or a hot tip lower returns with a lower risk, passed by a friend. Before investthen you could go for the stock with ing in a company always do lower returns, since at the end of the research on it. day you want to be with The BSE and NSE websites have an investment that has the a wealth of information on each highest return per unit of company; you can even check out the company's website and download its annual risk. reports. Analyse the financial details and only after all this decide on making an investment in the company.


and then do the evaluation. Thus if WHAT FOOLISH INVESTORS DO an investment in a company is PART IV expected to provide 50% returns SKIMP ON RESEARCH with almost a 75% probability, this would be much better than a safe One of the investment with returns of just main reasons why people 10%. lose money in Again even within stocks if one the stock marstock provides higher returns with a ket is because higher risk and another provides they invest on the basis of rumours or a hot tip lower returns with a lower risk, passed by a friend. Before investthen you could go for the stock with ing in a company always do lower returns, since at the end of the research on it. day you want to be with The BSE and NSE websites have an investment that has the a wealth of information on each highest return per unit of company; you can even check out the company's website and download its annual risk. reports. Analyse the financial details and only after all this decide on making an investment in the company.

Risk associated with investing in shares can be classified into company specific risk and market risk. You can reduce the risk by investing systematically in fundamentally strong com panies.

How can I benefit from

online trading? IN THIS CHAPTER: Using your computer to trade Trading online is convenient  Benefits of trading on sharekhan.com  

37

4. How can I minimise risks and maximise returns?

5. How can I benefit from online trading?

38


and using the software you can create appropriate filters to watch the movement of the stocks that you are interested in.

folio and calculate your earnings, check your depository account, transfer money from your bank to the broking account and vice versa, at just a click of your mouse.

7. Host of features a click away Place limit orders, check your port-

HOW SAFE IS ONLINE TRADING ON SHAREKHAN .COM?

“VERY!” Because we have an effective security system in place: 1. Strong encryption: we use a 128-bit encryption to ensure

a secure connection. The most advanced encryption technology, Secure Socket Layer (SSL), is used to ensure that the information transmitted between the trading engine and the customer across the Internet is safe and cannot be accessed by any outsider. In addition firewalls, internal controls and procedures put in place have made the entire system robust. 2.Password protection: to trade on your account, you will

need to provide a user ID and a password to enter the secure area of the site (sharekhan.com) as well as an addit ional password to place trades. The user ID and password allotted to a customer are kept completely confidential.

Share-Market-Beginners-Guide.pdf

Recommend Documents