Now you too can trade in equities

Disclaimer: I am not an expert, I have begun trading only eight months ago and am still in the process of learning. In these months I have gained some and lost some money. The following is based on my perception and understanding and may not be accurate. You are advised to confirm/cross-check with credible sources. If any flaw is found in this article, you are requested to notify me of the same.

As a student, you don't have much cash with you. But, if you have regular inflow of cash, why not invest it instead of spending it off? It is always wise to start investing early. At this stage, you may invest minimally and take this time to study the market and its principles. If you think investing in markets is not your cup of tea, you are wrong. You don't have to be an expert in economics to start investing.

Who can invest?
Any Indian citizen above 18 years can invest in markets.

What are the prerequisites to start investing?
You must have PAN (permanent account number issued by income tax dept), a demat and a trading account.

I don' have PAN.
You can apply for PAN, if you don't have and the procedure is very simple. Here is the website with guidelines on applying for new PAN. This site is also helpful.

What kind of bank account is required?
If your bank’s savings account is internet enabled, you can send to and receive money from your trading account. You can get your current bank account internet enabled, if your bank supports it. Presently several banks (Axis, IDBI, HDFC, SBI, PNB, ICICI) have this facility.

What is demat account?
Shares were initially in physical (paper) format, but now they have all been converted to demat (de-materialized) or digital format. You no longer receive physical shares, instead they are held in your demat account. Presently several bank and broking companies provide demat accounts. Some levy annual charges and some offer for free.
Most of the securities held and settled in dematerialized form in the Indian capital market are handled by depositories such as National Securities Depository Limited (NSDL). Central Depository Services India Limited (CDSL) is the other Indian depository service. In the depository system, securities are held in depository accounts, which is more or less similar to holding funds in bank accounts. They act like a custodian of shares and other security transactions. For more information on NSDL, you may read this PDF document

What is trading account?
You can't buy shares of any company directly unless it is an IPO (initial public offer). All shares must be bought through a broker (a broking company). There are several broking companies around, these are ICICI Direct.com, Reliance Money, Sharekhan, 5Paisa.com, Karvy, Kotak Securities, Indiabulls, Religare, HSBCInvestDirect, SHCIL, Standard Chartered, Way2wealth, SMCindia, Prabhudas Lilladher, Ventura Securities, Investmentz.co.in, Anand Rathi, Edelweiss.in. Most often, these companies also provide demat account.

What is the risk associated with investing in equities?
There are different modes of investment (real estate, gold, fixed deposits, etc) but none give returns as high as equities, but the returns are never guaranteed. It is possible to have returns in thee digit percentage or even lose the entire investment. As in any field, this sector too has its share of scams and frauds. With every episode, the regulating body SEBI (Securities and Exchange Board of India) comes up with newer regulations, which are strictly implemented. Although suffering losses to these factors can never be ruled out, they have certainly been minimized. You can visit their website.

How should I select the broker?
There are few important considerations you have to make before you select a broker.
If you are willing to trade online all by yourself, then the location of its office is not very important otherwise your broker's office must be accessible.
You must decide how you are going to operate your account; through broker's office, phone calls or manage yourself over internet.
What is the reputation of the broking company? You may have to do a little research online or ask few people who are into trading. There are plenty of complaints against several broking firms. Here is one website where you can find their reviews.
What are their brokerage plans? These companies offer differ percentages of intraday and delivery brokerages. Brokerage applies when you buy or sell shares (scrips). A given firm may have different plans according to the volumes the client trades. Sometimes, you can bargain the brokerage. You must be very careful here because there are many cases where the firms have not stuck to this commitment.
Before selecting the broker, ensure that your bank is listed by the broker for online transaction.
It would useful if you could contact the broking firms and have them explain their product and clear your doubts.

What is the procedure to open these accounts?
It is better to open both demat and trading account from the same service provider. Once you decide on a broker, you will be given an application booklet where you need to sign on more than 14 occasions. It is vital for you to know and understand what they mean. The application also includes power of attorney, which has been misused by several brokers causing huge problems to clients. It is not mandatory to sign the power of attorney but brokers provide you certain services only if you sign them. You will have to provide your photograph, address proof, PAN details, bank details etc. It is strongly emphasized here that you must understand well before you sign on dotted lines. Most often, the broking firms would ask the client to simply sign the document without filling all the details and that they would fill in the rest. I would suggest that you fill all the details yourselves. Don’t forget to nominate someone for your account. If your account is approved, your account should be active in 10-30 days depending on the broking firm. You would receive welcome letter along with your client ID and demat account details as well as delivery instructions (which you might hardly ever use).

How should I begin trading?
Once you have your PAN, demat and trading account ready and activated, you may start trading. It is a wise idea to do some research before you actually begin trading or else you would end up losing money. Spend some time researching before you actually begin trading. It is a good practice to research on a company before investing in it. Sites such as http://money.rediff.com/ and http://www.moneycontrol.com/ are excellent sources of these information.
You must transfer sufficient funds to your trading account. If you have linked your internet enabled savings bank account, you can transfer money instantly. If you are depositing through cheque, there may be a delay of few days.
You can place orders in different ways; you can walk into their office and place orders, call their specified number and place orders, or use internet at your place and place orders. While most firms offer trading facility through browsers, some provide special software for the same. These software are either free or have to be purchased separately. Clarify this before you obtain the account.

Which are the different ways I can trade?
Although there are many ways you can trade, I will mention about two types of trading in equities here. One scenario is where you buy the scrip (of any company) and sell it on the same day; this type of trading is called intraday. The other way is delivery, where you buy scrips and hold it in your demat account. The brokerages for both of these are different. There are two ways of intraday trading, you either sell them short or buy them long. If you buy a stock and then sell the same on the same day at a higher price, you are selling them long. You make profits only if the stock's price rises (bullish) or else you end up making losses. Conversely, if you sell a stock (that you don't hold in your demat account) and later buy them back at a lower price, you are selling them short. You end up making profits only if the stock's price falls (bearish) or else you end up making losses. If you decide on intraday trading, you must settle it on the same day (usually 30 minutes before the trading closes; [verify this with brokers]). If you plan on long selling but the stock's price declines instead of rising, you can either sell them at loss or carry it over for holding (hoping that it would rise some other day). If you sell it short but the prices unexpectedly rise, you have to buy it back at a loss. If you fail to settle this on the same day, there is another procedure that handles this, and you should not let this happen. Some brokers offer their clients an alarm system called stop loss which gets activated to prevent loss. Assume you buy a scrip for Rs.500 and intend to sell it at Rs.520, you may place a stop loss order at Rs.510. If the sell order gets executed at Rs.520, you are at profit but if it starts falling, the stop loss gets triggered when its price reaches Rs.510 and you still make profit. For more information on short selling, visit the wikipedia article.

What should I know about stock exchanges?
There are few stock exchanges operating in our country that are registered with SEBI. The two prominent ones are National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). In terms of volumes, NSE is the leading stock exchange. If your broker gives you the provision, you may trade in one or both these stock exchanges.

What should I know about buying and selling charges?
Every transaction attracts certain pre-determined charges, which adds up to the total cost. These include brokerage, service tax on brokerage, stamp duty, and securities transaction tax. When you buy a scrip, brokerage is added to it and then other charges add up to it. If you buy a scrip at Rs.100, it would actually cost you Rs.107 (an illustration only; not accurate calculation) when you take into account all the above charges. When you sell a scrip, brokerage is deducted from it and then the other charges also apply. If you sell a scrip at Rs.100, you actually end up selling it at Rs.93 (an illustration only; not accurate calculation). This is an important aspect that you should keep in mind before you buy or sell any scrip. If attention is not paid to this, you might end up making losses.
Some broking companies levy a fixed sum (besides brokerage) when you sell your holdings. You must take into account this factor too before you sell your holdings. When you buy a scrip on a day and then sell it the very next day, you may incur additional charges which are levied per scrip. These charges (some call it Inter settlement/ Beneficiary charges) apply if you sell them within 3 days (T+2). If the broker keeps the shares in his pool account and gives the delivery from the pool account, there will be no transaction in your demat account therefore, there will be no charges.
Although you would be provided with a relationship manager, it would be very likely that he would be ignorant about these charges. It is a good idea to clarify with the broking firm about these charges.

Can I buy shares even if I don’t have sufficient funds?
Normally, you can’t buy shares if you don’t have sufficient funds in your trading account. However, most firms provide you with trading margins. Some companies refuse you any margin if power of attorney is not signed. If you already have some shares in holding, your broker may offer you some margin depending on their market value and some depreciation. These margins fluctuate everyday and the companies usually email you the margin that is available to you before the trading begins. You must transfer the funds to your account as soon as possible otherwise you will have to pay interest for the duration. If you cannot transfer fund within the stipulated period, the broking firms have the right to sell (square off) the shares to recover their money.

How do I keep track of my transactions?
At the end of each trading day (if you had made transactions), the broking company is bound to send you the contract of the day’s trade inclusive of brokerages, service tax, STT, stamp duty etc. They would send you a digital copy of the contract to your registered email. Some broking firms send the list of transactions as SMS to your registered mobile phone. You must always verify the contents of these messages and contracts and bring to their attention in case of any discrepancy. When scrips are sold from your holding, SMS alert is also sent from the depository (NSDL/CDSL).
Some broking firms provide you with portfolios where your current holdings/ transactions/gains or losses are displayed in real time. An excellent free portfolio can be setup with moneycontrol.com.

What is the wise way of investing?
It is universally accepted that one cannot time the market. It is impossible to predict the rise and fall of the market. Sometimes sentiments drive the market, and at other times local or international business / political news alters the course of markets. It is good idea to keep an eye on the business and political news, as they profoundly affect the market performance.

As an investor you must carefully plan your portfolio and the amount of risk you are willing to take. You must remember that not all of your investments in equities will always perform well. It is possible that one particular stock may give you extremely good result and the same stock may destroy your portfolio some other time. There are stocks that very volatile and there are some which are less volatile.

Some investors tend to sell when their prices fall and book profits, then there are other types of investors who hold on to their stocks hoping that their prices would recover. There is another class of investor who buys the stocks whenever their prices fall (dips), so that the cost is averaged. Say, an investor bought a scrip for Rs.100, which went on to Rs.120 next day and thereafter started falling down. In this scenario, this investor would go on buying at Rs. 95, at Rs. 90, at Rs. 85, at Rs. 80 and then at Rs. 75. Now the average cost of this scrip is Rs. 87.5. If the price of this stock climbs up to Rs. 95, (which is Rs.5 less than what he initially bought) he still makes profit on selling.

Intraday trading can give high returns, but is often said “you win some but lose many”. Low brokerage on intraday trading is another factor that contributes to good returns. This is generally suitable to those who have appetite for high risks.

Some investors buy the shares and hold them for several years. If the company performs well in this period, the value of the shares would grow considerably. At the same time, company also gives them dividends, which is also an additional income. Some companies give their shareholders bonus shares, which can also significantly increase the investor’s holdings.

There is no sure way of making good money in the market, however investing in good companies, dividing the portfolio in different sectors (diversification), avoiding sentiment driven panic selling and staying invested for long term are generally considered good practices.