Equity Investments

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Equity investments are market-linked investments. The returns of equity are neither assured nor fixed. It depends on the performance of the underlying asset. Market movements play a crucial role in equity investment.

How to invest in Equity?

Investments in equity can be made through directly through Share markets or Mutual Funds.

Share Markets

Shares are traded on stock markets like the National Stock Exchange of India Ltd.(NSE) or Bombay Stock Exchange(BSE). An investor cannot trade(buy or sell) shares directly in the stock market. Trading of shares can be done only through brokers.

An Investor needs ,

  • 3-in-1 account: The account is needed to invest in shares. Most banks offer 3-in-1 accounts to their customers.
  • PAN card
  • POA – An investor needs to sign the Power of Attorney(POA) given to the broker to carry out the transactions on behalf of the Investor.

Accounts mentioned in 3-in-1 accounts are listed below

Savings Account– Hold funds for buying shares. Amount will be debited from this account on buying shares
– Funds Transferred to this account after selling the shares. Amount will be credited to this account on selling shares.
– Dividend Income from shares are deposited to this account.

Eg : Savings account from any Bank can be used
Trading Account– Investor interacts with Stock Exchanges like NSE/BSE to buy or sell shares using this account.
– Most Private sector Banks provides the Trading account.

Eg : HDFC Securities, ICICI Direct
Demat Account– Required to hold shares in Electronic Form.
– Demat account with either of the central depository participants like NSDL or CSDL is created
– The depository holds your securities under your name in De-Materialised or Electronic form.
3 in 1 Accounts

Mutual Funds

Mutual Funds are funds/pool of money collected from various investors to invest in a list of stocks. These funds are managed by Fund managers. An investor can either use 3-in-1 account or open an account directly from the mutual fund website.

Equity investment recommended for beginners

Beginners can start investing in mutual funds as mutual fund investments are less risky compared to direct stock investments. Index Funds are recommended for Beginners as these funds have less risk and a low expense ratio compared to other equity mutual funds.

Terms used in Equity Investment

Bear MarketBear Market is a market phase in which share prices are falling continuously.
Bull MarketBear Market is a market phase in which share prices are increasing continuously.
DividendsDividends are a part of the profit that a company wishes to share with its shareholders.
PortfolioThe portfolio is a combination of shares that an investor holds.
IPOInitial Public Offering (IPO) is a term used in stock market investment. It is a process by which a Private Limited company can go Public by selling its stocks to the general public. After issuing an IPO, the company will be listed on the stock exchange for trading.
NFONew Fund Offer (NFO) is a term used in mutual fund investment. It is a process by which an investment company offers any new fund. When NFO is launched, the firm raises capital for purchasing securities.
Capital Gains(or Loss)Capital Gains(or loss) is the Net Profit/Loss when an investor makes after selling a stock or units in a mutual fund.
Blue ChipBlue-chip stocks are shares of the company which is well-recognized by the general public. It has a long history of good financial performance and has the ability to perform well and make profits in both good and bad times.
Book ValueBook value is the net value of assets held by a firm on its balance sheet. It is roughly equal to the total amount all shareholders would get if the company gets liquidated.
EPSEarnings per share (EPS) is calculated by dividing the company’s profit with outstanding shares of its common stock. It indicates how much money a company makes for each share of its stock.
PE RatioPrice-to-Earnings ratio (PE Ratio) is a ratio calculated by dividing Share Price with EPS. A company with a high PE Ratio is considered over-valued or its investors are expecting high growth rates in future.
Growth StocksGrowth stocks are stocks of a successful company whose earnings are expected to continue growing at an average rate above the market’s rate. Growth stocks generally have a high PE Ratio and trade at a price above their book value in the stock market.
Value StocksValue stocks are stocks of a company trade at a lower price relative to its dividends, earnings, or sales. Values stocks have high dividend yield and low PE ratios.
Market OrderMarket order is an order to buy or sell a stock immediately at its current market price.
Limit OrderLimit order is an order to buy or sell a stock at a specific market price. The order can only be executed at the price specified by the investor or at a lower price.
Terms used in Equity Investment

5 Basic Things Every Salaried people should start following

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1.Start creating an Emergency Corpus

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Having an emergency corpus is a must. This corpus helps us in situations like delay in income, job loss, unexpected medical emergencies, vehicle breakdown, or expenses to cover home repairs.

The Emergency corpus can be created by opening a separate savings account. At least, 10% of your monthly salary should be transferred to that savings account. The total amount saved in the emergency corpus should be at least equal to 6 months of your salary. It is recommended to have the emergency corpus equal to your one year salary.

2. Purchase Health Insurance

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Everyone should have a health cover with a minimum sum assured of 10lakhs. Most employers offer health insurance to their employees. It is recommended to take a separate health insurance policy in addition to the one provided by the employer. If the employer provides you health insurance with the sum assured of 5lakhs, get separate health insurance with the sum assured of 5lakhs to cover the minimum sum assured amount of 10lakhs. Health insurance is also known as Medical insurance.

As per Section 80D of the Income-tax Act, a deduction up to Rs.25000 is allowed for health insurance premium paid towards self, Spouse or Children. Incase of premium paid for parents, an additional deduction of Rs.25000 is allowed. If the parents are aged above 60, the additional deduction up to Rs.50000 is allowed.

3. Purchase Term Insurance

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Purchase term insurance to provide financial coverage to your family in case of your death. This makes sure that your family does not face any financial struggles after your demise. It is recommended to purchase pure term insurance without any Money Back or Endowment Plans.

As per Section 80C of the Income-tax Act, the amount paid towards life insurance premium is eligible for tax deduction.

4. Set Life Goals

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Each of us has a lot of dreams. Set the short and long-term goals that you want to achieve in your life. Start working towards the goal.

5. Start Investing

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Follow the rule of “Pay yourself first”. It is recommended to save at least 20% of your salary for achieving your future financial goals. Start investing using debt instruments like Bank Deposits, Post office deposits, PPF or SSY and in equity instruments like Mutual Funds or Stocks. Once you get the paycheck, allocate 10% of your salary to the emergency corpus, 20% to your investment, and start planning your monthly expense budget with the remaining 70% of your salary.