Stocks and Equity Trading
Stock or equity is nothing but the ownership of the company divided into small parts and each part is called as share or stock. It is also known as equity. A person carrying a share of a company holds part ownership in that Company and this fraction of ownership is listed on a stock exchange.
The stock is traded on the exchanges and its price goes up and down based on economic and market cycles. A stock is one of the most desired asset classes in an investment portfolio which helps with long-term wealth creation.
The main objective of investing in shares is to achieve capital appreciation. Higher the risk, higher the return is true with equity investing. The risks are market-related, sector-related and even company related.
Investment in shares of companies can be bought or sold from the exchanges (secondary market) or through Initial Public Offers (IPO) (primary market). Stocks are the best long-term investments where in the market volatility and the resultant risk of loss, if given enough time, is mitigated by the general upward momentum of the economy.
There are 2 streams of revenue generation from this form of investment:
- Dividend – A company may pay-out dividends from time to time depending on its performance which will be in the form of money or additional shares called bonus shares
- Stock appreciation – One can sell stocks held to book profits and gain
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 one year.
- The rate of tax payable on capital gains on sale of shares sold within one year is 15%.
- There is not tax payable on long-term capital gains, which is a holding above one year.
- However, a small Securities Transaction Tax (STT) is levied on the value of purchased or sold equity shares at 0.125% and is paid by the purchaser or seller.
Stocks are risky investments and do not guarantee capital protection. They are neither inflation protected nor is there guaranteed return on equity investments. However, over the long-term stock investment is known to beat inflation and create wealth.
Shares are the most liquid financial instruments as long as there is a buyer for your shares on the stock exchange. However, shares of some companies may not witness any trading for many days altogether. In such a case, you will not be able to sell your shares. So, the liquidity factor varies to a large extent, and is stock specific.
