Everything to know about stocks

What is a stock?
A stock is an actual share in the ownership of a business. If you buy 10 shares of a company whose ownership is divided into 1,000 shares, then you are the owner of 1 per cent of the company. Since your share is tiny, you don't have any say about the company's operations. But you can gain financially from your ownership.

A share entitles the shareholder to a proportionate share in the residual profits of a business enterprise after other claims are paid out in full. If the underlying business prospers, the shareholders' wealth will multiply manifold. But if the business fails, shareholders may lose everything, unlike creditors who will have the first claim on the assets of the company.

How much are the returns?
Being residual owners in an enterprise necessarily means that shareholders can have no guarantee regarding the quantum of returns. Different companies operating in different sectors perform differently under different business cycles. But a well-diversified portfolio of high-quality stocks held for a long period of time should deliver higher returns than the nominal GDP growth of the country and by implication, other generally available fixed-income alternatives. The returns generated from equities are expected to be superior to other alternatives, even on a risk-adjusted basis.

How risky is it?
Equity investment is a risky venture, with no guarantees in stock and a possibility of the permanent loss of the capital. Hence, conducting in-depth due diligence is an integral part of the equity-investment process.

Who can invest?

• Any individual above the age of 18.
• Any individual below the age of 18 can invest through a guardian.
• Non-individuals (HUF, trust, companies, firms, LLP, etc.)

How much can you invest?

• Minimum: Price of one share. No defined limit.
• Maximum: No limit.

What return will you get?

• A share in the underlying profits of the business.
• Entitlement for dividend, bonus shares and other shareholder privileges.
• Voting rights on major issues which need shareholder approval.

Will it beat inflation? Yes.
Will it change during the tenure? Yes.
Can the invested money go down in value? Yes.

What is the tenure?
While there is usually no requirement to hold a share for any particular period, it is still recommended that only that portion of the investments which can be set aside for long periods should be invested in stocks.
Exit option: No restriction on withdrawal.

How is it taxed?

• Is 80C benefit available? No.
• Returns/Interest: Taxable as capital gains.

What are the tax implications?
Gains from Indian equity stocks are taxed as capital gains. If the shares are held for more than one year, the gains beyond Rs 1 lakh in a financial year are taxed at 10 per cent. If the stocks are sold within one year, the gains are taxed at 15 per cent. Dividend, if any, is added to the taxable income of the recipient and taxed as per the applicable tax slab.

In the case of international stocks, the gains are taxed at 20 per cent after providing the benefit of indexation if they are sold after two years. If they are sold within two years, the gains are added to the taxable income and taxed as per the applicable slab.

What is the lock-in period?
As a general principle, no lock-in period is prescribed for holding shares. But investors must be mindful that the ability to sell one's shareholding is also dependent on market conditions, i.e., the availability of liquidity and a favourable price quotation.

What happens if the account holder dies?
The nominee mentioned in the Demat account receives all the shares that are held in the Demat account and the account is closed. However, if there is a joint account holder, then such a holder will become the sole owner of the shares.

How should one start investing in it?
While the simplest way to get exposure to equity as an asset class would be to purchase mutual funds, investors looking to buy shares directly need to open a trading account as well as a DEMAT account. The DEMAT account is for holding shares digitally. In other words, it is the equivalent of a bank account for the money. KYC norms will be applicable. Now, investors will be able to purchase and sell all the shares that are listed on stock exchanges which will be executed on a T+2 basis, i,e,m the actual delivery of shares will be within two days from the date of the transaction. Documents that are generally needed include:

• Aadhaar
• PAN
• Bank-account statements

Suitability and alternatives

• Suitable for investors in most age groups who have long-investment horizons
• Not suitable for investors who are looking for regular income. It may also not be suitable for senior citizens who have short investment time frames.
• Alternatives: While it may seem that international stocks, IPOs, etc., are viable alternatives, all of them are actually variants of the equity asset class.

Suggested read: Six parameters to look for in a company before investing

This article was originally published on December 21, 2021, and last updated on August 12, 2022.