Investing in the equity market may seem to be challenging for many of the investors who are new to this field. But the functioning of the stock market is not as tangled as it may sound to a new investor. Only if you learn a few basic things before you start investing in the share market, you will be able to have a grip on the field and can perform better. Prior to start investing you must know a few things such as what equity investment is, how it works and how to start investing in the equity market. Here is what you need to know about equity investment.
What is Equity Investment
Here we have bought the simplest explanation of equity investment. Let’s say a company needs to raise money. The common ways of raising money for a business is a business loan. But the drawback of a business loan is that one has to return the money to the lender with the agreed interest irrespective of profit or loss in the business. Instead of availing a business loan, businesses can raise fund from the public by giving them a share in the ownership of the business. When a company goes out to collect money from the general public, we can buy a partial share of the company which is called equity investment. Unlike a business loan, the company will not return you the money you have invested but will give you a dividend of the profit earned by the company.
How Does Stock Market Work
The functioning of stocks depends on the ownership dividend of the corporation which is selling the stocks. If a company’s ownership is divided into 100 parts, so will be the profit. The company will have the final call on whether to distribute the profit among the shareholders or to reinvest the profit in the business. The company can come out with an IPO (Initial Public Offering) where the shares of a company can be bought and sold. The public listing companies can sell their shares in the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) which are the biggest market place for an equity share. A company must have a public listing to sell and buy stocks in the equity market.
6 Steps to Enter in the Equity Market
- Apply for a PAN card
The Permanent Account Number is a must have for making any financial transaction. The PAN is given to individuals by Tax Authorities for assessing their tax liabilities. PAN number is required for almost all financial transactions such as opening a bank account, filing ITR, investing in mutual funds and investing in the stock market. So if you don’t have a PAN card, apply it to enter the stock market.
- Hire a Broker
No individual can directly enter the stock market and start selling or buying stocks of one’s choice. Only a category of people are authorized to do so and they are called brokers. Brokers are the individuals or companies or the online agencies who have a license provided by SEBI (Securities and Exchanges Board of India). You are to find a broker to start investing in the stock market. One can find a number of brokers online too.
- Open a Demat and Trading Account
The next step of investing in the stock market is opening a Demat account. When you make a transaction in the stock market, the certificate of the shareholding will never be a physical one. The Demat account is the one where stocks or shares in your name and the same will reflect. The buying and selling of shares happen over Demat account only.
- Depository Participant
A Demat account reflects the number of shares one owns. But the shares are actually held by Depository Participant. The Depository Participants only holds the shares one purchase and releases when sold. In India, two Depository Participants are functioning: NSDL (National Securities Depository Limited) and CDSL ( Central Depository Services Limited). The depository account is generally taken care by the broker who helps you in investment.
- Obtaining UIN
If you are planning to invest a bigger amount in the stock market, you are to obtain UIN or Unique Identification Number. This number is required if you plan to invest Rs. 1, 00,000 or more at a single time.
- Start Trading
Once you are ready with all your requirements, you can start buying and selling shares. You are to inform the broker about the share you want to purchase at which price. You can order your broker to sell or purchase a particular quantity of shares at a prefixed price given by you. So the broker will sell or purchase shares when the price will come equally to your prefixed one. The order of transaction is valid for a fixed time. If the share prices never come to your desired price within the time frame, the order will be cancelled and you will have to raise another request.
To Sum Up
The investment in the stock market must be done after checking the past performance and future potentials of the company in which you want to invest. The hasty of less informed decisions can make you land in hot water at any given time. Above all, if you are investing in the stock market keep your expectations realistic.