Investing in equity involves purchasing shares of a company listed on a stock exchange. You can acquire these shares in two ways - either through the Primary Market, i.e., when a company makes an offer to issue its equity for the first time (this is called Initial Public Offering (IPO)) or through the secondary market, i.e. via a stock exchange. When you trade in equity through a stock exchange, you have to make use of the services of a brokerage firm, which acts as your agent whenever you buy or sell.

Equity is considered a high risk-high return investment avenue. This is because there is scope for considerable appreciation or loss of the capital that you invest, depending on various factors such as the performance of the company that you have invested in, general market conditions, the state of the economy, etc. However, it forms an integral part of any well-balanced portfolio, since it is at one end of the risk-return spectrum.

Equity is a must for any well-balanced portfolio. So, irrespective of whether you are a high net worth investor or a small retail investor and irrespective of whether you have a large or timid appetite for risk, you must hold some portion of your assets in equity. This is because it is the only instrument that has the ability to truly deliver a high return, when held over a long period of time.

However, the amount of equity that you hold in your portfolio is a very subjective decision and will depend upon various factors. These include your investment objectives, time horizon and risk appetite. But as a general guideline, there’s a rule of thumb that states that to decide upon the proportion of your assets that should go into equities, reduce your age from 100 and that’s the proportion of your money which should be put in equities. The remaining can be invested in fixed income securities.

Every investor must do some homework before investing money in equities…

v      While recommendations and tips received from your broker, a friend, etc. may be the starting point of your selection, let it not be the only reason that makes you purchase a particular stock, even if these tips have come from ‘market experts’. Short list the shares that you want to buy on the basis of your investment objective, risk profile and the stock’s fundamentals.

v      If you feel that the price of a stock is high, don''t purchase it. Buy stocks that you believe still have scope for appreciation.

v      Don''t try to time your purchases. That could turn you into a speculator instead of an investor. 

v      Lastly, once you have purchased shares, if the business prospects of the company change to its detriment, get rid of the stock. Don''t hesitate to liquidate your portfolio before your target time horizon if circumstances lead you to believe that it’s necessary.

There are various factors that determine the value of a stock. Understanding these will help you to pay a price that reflects the true value of a stock.

Demand and Supply: In the short term, the basic economic theory of demand and supply determines a stock’s worth. So, when the demand for a stock exceeds its supply (that is, there are more buyers than sellers), its price tends to rise. And, when supply overtakes demand (that is, sellers exceed buyers), the stock loses value. However, these are short-term market trends, which tend to get evened out over a period of time. In the medium to long-term, a stock is driven by the company’s fundamental strength i.e. business potential, past performance, competence and credibility of its promoters and management, etc.

Growth potential: Investors are willing to pay a premium for stocks of companies that have the potential to increase their revenues and net profits. The greater this growth potential, the higher the premium given to the stock. If a company proves that it is capable of sustaining growth, the market will continue to give it high valuations. And, that’s likely to be the major driver for stock valuations.

Fundamentals: A company’s growth outlook is linked to its business prospects and how well its management is capitalising on the existing opportunities. The quality of a company’s management is crucial. So, pay attention to the management practices of a company and its level of corporate governance.

Buy low and sell high is the ultimate guide to successful stock investing. It is also the reverse of what many investors do, although they don’t intend to. They tend to buy high and sell low because they use price, and in particular, the price movement, as their only signal to buy or sell.

Investors are tempted to buy stocks that have shot up and are basking in the media spotlight just to get a part of the action. They jump at a stock that is already trading at a premium… that’s how they buy high. Ironically, if a stock has had a good run up it may be time to sell, not buy (sell high).

On the flip side, when a stock price is falling, most investors may want to sell in a panic, although the company has not lost any intrinsic value and still remains a sound investment…that’s how they sell low. In fact, when a stock’s price has fallen, it’s a great time to buy (buy low), if your research on the company suggests that it is a good long term buy.

Experienced traders can make money jumping in and out of a stock that’s caught the public’s attention, but it’s not a game for the inexperienced and it can definitely not be called ‘investing’, in the true sense of the word. There are risks involved and tax consequences that apply to such trading, along with other issues, which means that most investors should leave this tricky activity to short-term traders.

There are various risks that companies are exposed to and when you invest in equity, your returns are affected by these risks. These are business risks (i.e. the risks associated with the prosperity of a business and the demand for its products), financial risks (the skill with which a company’s finances are managed to ensure that it has an optimum level of debt, equity, reserves, etc.), industry risk (changes in technology, regulations, fashions, etc., affect the performance of an industry), management risks (the level of corporate governance, management skills and vision), political, economic and exchange rate risks (these factors affect a company but are outside its control). There are other risks, such as market risks (the risk that the market will collapse, or that you have invested at the peak), which determine your returns on your equity investment.

Before you start investing in equity, you need to open the following accounts:

          - A broking account with a stock broker

          - A demat account with a depository participant

          - A bank account for cash payments and receipts (you can use one of your existing bank accounts for this purpose)

You then need to decide whether you want to invest by making purchases/taking delivery of shares or by undertaking margin trading (in this case you pay only a portion of the cost for purchases and your broker funds the balance and you don’t take delivery of the shares. You simply book your profit or loss).

Investing in equity involves incurring the following costs 

• Brokerage charges

You will have to pay a nominal one-time account opening fee and brokerage charges for every purchase and sale transaction undertaken. Presently, brokerage charges range between 0.25 per cent and 0.85 per cent.

• Demat charges

These are charges levied for maintaining your demat account. These charges include periodical charges for maintenance of the account, transaction charges (for each debit and credit of shares for sales and purchases respectively) and other incidental charges.

• Payment of Securities Transaction Tax (STT)

Investing in equity involves paying of Securities Transaction Tax (STT) while buying as well as selling shares. Presently, STT rates are:

• Payment of Service Tax (ST) and Education Cess (EC)

The dividends that you receive on shares are not taxable in your hands. You are, however, required to pay short term capital gains tax on any short-term capital gains that you make from transacting in shares. These are gains that arise from selling equity shares that have been purchased and sold within a period of less than 1 year. The rate of tax payable on such gains is 11.22 per cent (10 per cent tax + 2 per cent education cess + 10 per cent surcharge, if applicable). There is no tax on long-term capital gains.

Further, while transacting, you are required to pay Service Tax at the rate of 12.24 per cent on the brokerage charges that you pay. In addition, you have to pay Securities Transaction Tax (STT) on certain types of sale and purchase transactions of shares. The STT rate for delivery-based transactions is 0.125 per cent of the transaction value for both buyers and sellers. For non-delivery based transactions, STT of 0.025 per cent of the transaction value is payable.

If you have grievances against a listed company/ intermediary registered with SEBI, you should first approach the concerned company/ intermediary against whom you have a grievance. Then, if you are not satisfied with their response you can approach SEBI, who is the regulatory authority for such entities. SEBI takes up grievances related to issue and transfer of securities, non-payment of dividend, etc. with listed companies. In addition, this market regulator also takes up grievances against various intermediaries that are registered with it. Visit http://www.sebi.gov.in/ for more information.