How to play the stock market

Hyderabad: The stock market in recent times has exhibited wide movements either ways. In days it rose, BSE was up about 800 to 1,000 points, aiding in wealth creation. On days it dived, it fell around 700 or more points, giving an opportunity for the existing investors to buy stocks at a lower price. The […]

Hyderabad: The stock market in recent times has exhibited wide movements either ways. In days it rose, BSE was up about 800 to 1,000 points, aiding in wealth creation. On days it dived, it fell around 700 or more points, giving an opportunity for the existing investors to buy stocks at a lower price. The falls also make it the right time for newbies to wade into the stock market waters.

Of course, researching stocks before investing is a must. However, those who are not risk averse can begin their journey by opting to systematic investments in a single or even a basket of stocks. They need to just decide on the frequency and amount and should stick to it investing when the markets are rising as well as falling.

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What is Equity SIP?

Systematic Investment Plan (SIP) removes the hassle of timing the market. (Anyway, not many get it right.) SIP creates wealth in a disciplined manner. Using SIP, one can build a portfolio over time by investing a fixed amount in the same stocks at set intervals.

To begin with, select financially stable companies that operate in a profitable area with long-term growth prospects. There is no need for monitoring the portfolio on a day-to-day basis. Some brokerages suggest a fixed set of stocks based on the amount that will be invested. If this does not suit, you can choose the stocks that you want to invest in.

Several brokerages are offering these SIPs. Transaction fee and applicable taxes apply like regular purchases.

Lower risk

This SIP approach reduces the overall risk due to market fluctuations as it uses the concept of rupee cost averaging to allow you to buy more stock units when the markets are low and lesser units when they are high.

Goal based investing

SIP in equities is suited for the salaried individuals who aim to save for long-term goals without having to invest in one-go. The approach inculcates discipline as the corresponding amount is automatically debited from the bank account on the set date. With time, comes in the power of compounding, where the profit earned on the initial investment is reinvested.

Exit

Like entry, exit from the stocks cannot be timed. However, one can use the stop loss feature to halt the erosion of value if stocks fall below a threshold. Once the price hits this mark, the stocks will be sold. While this protects the value of investment going down, it also nullifies the future possibilities of making a profit when it rises again, and perhaps to new highs, in days to come, as you have already exited the stock.

Tax outgo

If a profit is made, the capital gains tax will be 15 per cent if sold within a year. It means for every Rs 100 profit earned on the investments, a tax of Rs 15 will be deducted if the exit is within one year. If the exit is after one year, the profit is taxed ten per cent for profit above Rs one lakh.

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