Why You Should Invest In Stocks And How To Start Investing

You get more return for the money invested in a stock over a period of time. Usually, a fixed deposit account in India may not yield more than 10% returns in a year but in stock market, it can happen in a single trading day. Reverse is also true, it can wipe out 10% of the investment in a single day.

For example, Infosys Technologies Limited has appreciated nearly 330 times since 1994. This is just impossible with any other type of business.

Having said that, stock prices simply do not always go upwards. They do fall. Sometimes the fall can be so heavy that it erodes investor wealth by more than 5 or 10% in a session.

Investors will ideally want to buy a stock when demand is about to pick up for the stock and sell when it slowly disappears. But that has to be estimated using some analytical techniques. These are called fundamental analysis and technical analysis. Fundamental analysis focuses on company’s business model, earnings forecast, demand and supply scenario for the company’s products and services and so on. Technical analysis uses price and volume analysis for predicting future price movements.

Procedures for investing in India:

An Indian resident, a non-resident Indian or person of Indian origin (PIO) can invest or trade in Indian stock markets. The rules are slightly different for NRI’s and PIO’s.

Prior to 2001, securities were being traded in physical form i.e. paper certificates were in use. This resulted in delays, loss in transit, signature mismatch, theft etc. With the online trading system, shares are held in electronic form very much like money is held in a bank. This is called a ‘demat’ account. (Demat stands for dematerialization.) It is now compulsory for all securities to be traded under demat segment only. The IPO’s or the initial public offerings insist that the applicant needs to have a demat account.

There are two depositories in India, National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). They hold the equity shares for a fee.

All transactions in the stock exchanges are through brokerage houses only. Some of them offer internet trading facility too.

Demat Account:

This accounts holds the shares in electronic form. Sold shares will be debited by the Depository Participant (DP). Similarly, bought / bonus shares will be credited to this account.

To open an Indian resident demat account, one has to approach a brokerage house. The person(s) will have to:

Fill out demat account opening form
.

Fill out demat account opening form
Provide PAN (Permanent Account Number) card issued by Income Tax department
Provide proof of identity (such as passport, driving license etc.)
Provide proof of residence (such as passport, telephone bill, etc.)
Provide a working savings bank account number for credit of dividends

It may take approximately 2 to 5 working days for opening a demat account. The broker may also issue depository instruction slips which should be filled when stocks are bought or sold. Both client and broker need to have account with the same DP in order to transact. In case of online trading, no such slips are needed; in some cases, depository participant and trading member (broker) may be the same.

Trading Account:

A trading account monitors the cash transactions of the client. Based on his delivery/intraday transactions, the broker will debit/credit the amount due in his trading account. If a client wants to purchase stocks for which he needs funding from broker (also known as margin) he needs to enter a margin trading agreement with broker. The broker may allow purchase of securities depending upon the market value of clients’ holding and cash balance. In case of delivery (i.e. buying from the market and holding it for sale later) the broker needs to be paid within settlement date i.e. two working days from trade date. However, some brokers may allow a day or two extra.

The procedure for opening a trading account is similar to opening a demat account. A POA (Power of Attorney) agreement needs to be signed by the client and broker. In case the client fails to pay the margin, the broker at his descretion, may square off the transaction.