Time to take stock and make some money

Indian households account for a sizeable chunk of the country’s total savings. Unlike developed countries, Indians invest in deposits or assets like gold, but this could change if the growing middle class turn to stocks

Published: 18th July 2016 07:49 AM  |   Last Updated: 18th July 2016 07:49 AM   |  A+A-

CHENNAI: After a lull, Initial Public Offers (IPOs) are back with a bang. According to PRIME Database, for the first time in 9 years, companies raised the highest capital through IPOs between April and June. The rest of FY17 looks promising, with 19 companies holding SEBI approval and another 5 awaiting approval, says Pranav Haldea, MD, Prime Database.

Not just private companies, even state-run general insurers like New India Assurance, and General Insurance Corporation are readying for an IPO debut.

Time.jpgStrangely, the average Indian’s interest in stocks is way below others. Less than 1.5% of the total population invest in securities, compared with almost 10% in China and 18% in the US. Just 2% of India’s household savings are in equity as against 45% in US, as per Bloomberg data.

“Indian investors are still scary of direct stock investment and even into equity mutual funds. If they have capacity (in terms of money and knowledge) and time, one can opt for direct equity. Else, equity mutual funds are goo,” says Basavaraj Tonagatti, Certified Financial Planner.

Traditional fixed deposits are already yielding negative returns and with banks offering 7.25% interest rate, returns are likely to drop further. Given a steady income and a risk-appetite, now may be the time to invest. 

What’s a stock?

Shares, stock or equity represent a claim on the firm’s assets and earnings. You become an owner, but can’t run the business. You are entitled to a share in profits and dividends.

Why does a firm sell shares?

Timea.jpgClearly, to raise money. Companies can either borrow from banks of financial institutions or sell shares or issue bonds. When you buy a debt instrument like a bond, it comes with an assured interest rate. But with shares, there’s no guranteed return and hence risky. If the company does well, your stock grows multi-fold or it could completely tank.

Types of stock

Two types of stocks: common and preferred stock. Common shares represent company ownership and a claim on profits. Investors get one vote to elect board members. It entails riks and if it goes bankrupt, shareholders may not get back their investment. Preferred stock comes with a guaranteed fixed dividend and in the event of liquidation, they are paid off first than common stockholders. Also, the company can re-purchase this stock, at a premium.

Types of share markets

Two kinds -- primary and secondary. A primary market is one where a company gets listed on a bourse to issue shares and becomes public. Once done, they are traded in the secondary market, where investors buy and sell shares.

How to trade?

Open a trading and demat account, linked to your savings account. Several intermediaries like ICICI Direct, HDFC Securities, facilitate this.

What are traded?

Four key financial instruments are traded on bourses. Other than shares and bonds, one can also trade in derivatives and mutual funds. Derivatives are nothing but instruments that you agree to buy or sell at a pre-determined price on a particular date. Similarly, mutual funds are products put together by fund houses. They pool multiple investors to invest in a combination of bonds and stocks that the professional fund manager determines will give you the best return after a fixed tenure.

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