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What is Equity Investment? Is it the same as investing into stocks or shares?
Equity Investment means investing in shares of the company,which are listed in the stock market.
Yes the word equity, stocks and shares are synonymous and investing into equity also means as investing in stocks or shares of the company.
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What is a Company? And what are the different types of Companies in whose shares investments can be made?
The Joint Stock Company is a legal entity whose capital is
contributed by various stake holders into that company in
lieu of shares allotted to them. According to the Companies
Act broadly there are Private Limited, Public Ltd., and Listed
Public Ltd Companies., In first 2 categories public is not
widely invited to invest into the shares of the company and
hence they are closely owned company. While in third case
only public is widely invited to own the shares of the company,
by way of initial public offer and then they are listed on the
recognized stock exchanges like Bombay Stock Exchange (BSE)
and National Stock Exchange (NSE). Say for example company
comes with an initial public offering of 1 crore shares of
Rs.10/- each out of which an investor is allotted Rs. One lakh
shares of Rs.10/- each on application being made by him in an
IPO offering and hence now an investor is owning 1% of the
company’s capital ie. Rupees Ten lakhs.
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What is a Primary market and what is a Secondary Market?
Any company who wants to raise its capital for its business
approaches the public at large with an offer to issue and allot
certain number of shares at certain prices. This is called as an
initial public offering by the company in the Primary market.
Once these shares are allotted they get listed in the recognized
stock exchanges where trading in the value of the shares take
place in free market place by large number of buyers and
sellers. This market place is called as a Secondary market.
Currently on a nationwide basis BSE and NSE provides an on
line trading platform to trade in Secondary market.
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How one can invest in Shares?
(i) Direct Route : One can open an account with any BSE or NSE
Broker and buy and sell shares in BSE or NSE directly. Investing
directly calls for a bit of knowledge about the company and its
business. One can also depend on research based advice given
by his broker. Further one should have enough time to track
his investment regularly. If you do not have these essentials it
is advisable to opt for a professional to manage your
investments via Portfolio Management Services (PMS) offered
by any Investment Advisory Companies.
(ii) Indirect Route : One can invest into Mutual Fund which in
turn invest into the stock market. Mutual Fund collects the
money from the large number of small to big investors and
then invest those money in equity shares. They possess
requisite skills and expertise to do this job for which nominal
asset Management fees is charged by them on total corpus.
Those who doesn’t possess requisite skills and time. Mutual
Fund is ideally suited for them.
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Who should invest in Stocks and in how much proportion?
Generally younger people are considered ideal candidate for
investing in shares since they have more risk taking capabilities
than elder one. The thumb rule is to deduct your age from
100. Ideally your equity exposure should be that figure. For
example, if you are 30, your equity exposure should be 70
(100 – 30). One should reduce equity exposure with advancing
age, However, lately because of increase life expectancy and
cost of living experts advise to have atleast some exposure to
equity in all ages.
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What is a Right of the equity share holder of a Company?
As an equity share holder one is entitled to a dividend if
declared by the company. One is also entitled to the rights or
bonus, shares declared by the company. Besides that, one has
the right to cast his vote in a General Meeting on a various
resolutions.
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How easy is it to make money from investment in shares?
It is not very easy to make consistent money from investing in
the shares as there are lots of risks and uncertainties involved
in that. That is why it is very important to pick the right
stock at a right time matching your investment objective.
Generally if you are buying shares of the company with a
strong track record and good Management will always give
decent return in the longer run. As already mentioned one
should exercise due care and diligence in selecting particular
stock
One can also make money by trading into stocks and derivates.
However, here again most stringent trading and money
Management skill is required. For those who have articulated
art of trading and investment investing in shares is very
rewarding.
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How to analyse Stocks for investment and trading?
Broadly there are 2 methods to analyse stock
(i) Fundamental analysis and
(ii) Technical analysis
Generally for taking an investment decision of medium to long
term horizon, fundamental analysis is widely followed. While
for short term trading decisions Technical analysis is widely
followed.
Fundamental Analysis involves evaluating companies value by
evaluating companies business model, demand and supply of
its product, its relative strengths and weakness in the industry
in which it operates., the position of the industry, the sales and
profit growth, return on equity, growth in earnings per share
etc., value so arrived at is then compared with the on going
market prices. If it is found that the market price is significantly
lower than that, then it is advisable to buy the shares of that
Company expecting that market will revalue the shares in
future thereby offering capital appreciation in the value of the
shares.
Technical Analysis on the other hand focuses on the market
price movement of the share in the past mainly through graphs
or price and traded volumes in order to judge further
performance. Short term traders generally looking for a trading
opportunity tries to capture the price trend for short term
money making opportunities.
Although these two are widely followed and more rational
approach for buying and selling decisions they are not infallible
and hence are not full proof.
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What are the dos and don’t to be followed while investing into equity?
(i) Do not buy on rumours, debts. Remember investing in
equity is not like a gambling, it involves skill and knowledge.
(ii) Always buy shares of a companies whose business you
understand. Consider investing in those stocks/industry with
whom you had an opportunity to work or may be a company
manufacturing a popular product which you yourself use.
(iii) Study company thoroughly with whatever available
information. Talk to people to whom you can trust to give
you unbiased information about the company, read
newspapers/ magazines to find leaders in various business.
(iv) For relative safety and better chances of appreciation buy
shares for longer term, buy the shares as if you are buying
business.
(v) Never buy in haste. If you are buying a good business for a
longer term it is good buy irrespective of time.
(vi) Always diversify in 8 to 12 stocks since these are number of
companies one can track regularly with proper focus. Too
less a diversification makes a portfolio more riskier at the
same time too much of a diversification results in to loss
sof focus.
(vii) Never be impatient and panic. A short term ups and downs
in the share prices resulting into paper profit or loss should
not bother you much.
(viii) A good company with a good business and Management
will always remain good investment in long term.
(ix) Do not buy the shares from borrowed capital. Borrowed
money involves paying regular interest and returning capital
at a predefined time since investment in the shares involves
risks and requires patience of a long term nature, the time
horizon and cost involved of the borrowed money some
time may not match with the investment period.
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When the stocks should be sold for maximum profit?
There is nothing called right time to sell. Ideally one should
sell the stock when the company stops posting growth, one
can also sell when desired profit percentage is achieved.
However, one should be realistic in his desire. It is widely
believed that booking profit regularly is best way to maximize
profits.
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Where my complaints relating to equity investments can be redressed?
Following are the addresses of the authorities where any
complaints against companies or market intermediaries can be
sent :
Securities and Exchange Board of India
Mittal Court ‘B’ wing, First Floor,
224, Nariman Point,
Mumbai – 400 021.
Phone: 2850451-56, 2880962-70
Besides both the BSE and NSE, has its own Grievance Cell to
attend to investor complaints of companies listed on their exchange.
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