Is second income on your mind?
Know the rules of investing in stocks and play a long innings
Hyderabad: Telangana has nearly 22 lakh retail investors on the BSE. This number is 91 per cent more from 10.4 lakh people in the same month last year. The increase is mainly because many people, who are working from home, started to see stock investment as a second income channel. However, not all people succeed in creating wealth as they do not pay attention to some key aspects.
Choice
In the stock market, 95% of all stocks do not even end up beating the fixed deposit returns over long periods. Almost 99% of the wealth is created by the top 1% of the stocks. Investing in good stocks will make money over the long run. However, the catch is one should be able to identify if a stock is good or not, says Nirali Shah, Head of Equity Research, Samco Securities.
Research
Most retail investors end up buying stocks-based hearsay without any scientific or rational basis or have an understanding to evaluate a stock. Due to this, people end up losing money by buying and holding absolutely the wrong stocks. “Do your own research. Many pick a falling stock in the hope that it will rise quickly. Some get excited about revival plans being announced by companies but they do not realise that these plans take time to be implemented. Also, the results can go in any way,” she says.
Cylical nature
Some stocks are cyclical in nature- they rise and fall at different phases. Ideally, one should invest when they are at their lowest and sell when they are at their highest. However, many invest when stocks are at their peak valuation hoping that they will rise further. Then the downwards cycle begins and the value falls significantly. Once, they see the values falling, they exit and in the process make losses. Same applies to some sectors whose performance depends on supply-chain, demand, raw materials and other external factors.
Invest, not speculate
If someone starts investing around 25-30 years age, then the equity exposure could be around 60-65 per cent of the investment portfolio. Exposure to equity should decrease with age. Building wealth needs time, at least three to five years. “Stock market is not a source of daily income for all. Day trading is fraught with many risks and is for professionals with required skills,” says Nirali.
Associated costs
There is need to have a demat account. Most banks are pairing this with their offerings. Some collect annual maintenance charges, which is about Rs 500 or above. There is a also flat or a small percentage brokerage per transaction. There is also a 0.1 per cent Securities Transaction Tax, a direct tax, levied on every purchase and sale of securities.
Gains and losses
If equity shares are sold within 12 months of purchase for a gain (at a price higher than the purchase price), these gains are taxable at 15% irrespective of the income tax slab. If sold after 12 months, gains are not taxable up to Rs 1 lakh and amount after this attracts a capital gains tax of 10%. Any capital loss from sale of equity shares can be set off against short term or long term capital gains from any capital asset or can be carried forward.
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