Wednesday, December 23, 2009
1) Purchase shares from the primary market (ie IPOs)
The first time that a company’s shares are issued to the public, it is
by a process called the initial public offering (IPO). In an IPO the company
offloads a certain percentage of its total shares to the public at a certain price.
Most IPOs these days do not have a fixed offer price. Instead they follow a method called the bookbuilding process, where the offer price is placed in a band or a range
with the highest and the lowest value (refer to the newspaper clipping on this page).
The public can bid for the shares at any price in the band specified. Once the bids
come in, the company evaluates all the bids and decides on an offer price in that
range. After the offer price is fixed, the company either allots its shares to the people who had applied for its shares or returns them their money.
2) Trade in the secondary market, ie stock exchanges
Once the offer price is fixed and the shares are issued to the people,
stock exchanges facilitate the trading of shares for the general public.
Once a stock is listed on an exchange, people can start trading in its shares. In a stock exchange the existing shareholders sell their shares to anyone who is willing to buy them at a price agreeable to both parties. Individuals cannot buy or sell shares in a stock exchange directly, they have to execute their transactions through authorised members of the stock exchange who are also called stock brokers
in the value of money. Inflation occurs when most prices rise by some degree across the economy.
RETURNS ON DIFFERENT
TYPES OF INVESTMENT
1980 AND 2005
Bank Fixed Deposits
During this time Inflation grew at Source: Data compiled from the RBI handbook of Statistics, NCDEX Disclaimer: Investments in equity related securities involves a high degree of risk. Please read the Risk Disclosure Document as prescribed by Sebi
period of 1980-2005 while the other instruments have barely managed to generate returns at a rate higher than the inflation rate (7.10%), on an average shares have
given returns of about 17% in a year and that does not even take into account the dividend income from them. Were we to factor in the dividend income as well, the shares would have given even higher returns during the same period Historically shares have outperformed all the other investment instruments and given the maximum
returns in the long run (see the table on page 7). In the twenty-fiveyear period of 1980-2005 while the other instruments have barely managed to generate returns at a rate higher than the inflation rate (7.10%), on an average shares have given returns of about 17% in a year and that does not even take into account the dividend income from them. Were we to factor in the dividend income as well, the shares would have given even higher returns during the same period
real estate et . Out of these shares are the best option for individual investors.
order to create wealth. While investing is relatively painless, its rewards are plentiful. To understand why you need to invest, you need to realise that you lose when you just save and do not invest. That is because the value of the rupee decreases every year due to inflation. For example, if you ran a household within a budget of Rs100,000 in 2000, to run the same household today (assuming the
same set of expenses) you would probably need Rs125,000--that's Rs25,000 added to your budget because of inflation! Thus you need to generate an additional Rs25,000 and that can be possible only by INVESTING your hard-earned money.
shares are attractive as much for the appreciation in the share prices as for the dividends their companies pay out. Tax advantages: shares appear as the best investment option if you also consider the unbeatable tax benefits that they offer. First, the dividend income is tax-free in the hands of investors. Second, you are required to pay only a 10% short term capital gains tax on the profits made from investments in shares, if you book your profits within a year of making the purchase. Third, you don't need to pay any long-term capital gains tax on the profits if
you sell the shares after holding hem for a period of one year. The capital gains tax rate is much higher for other investment instruments a 30% short-term capital gains tax (assuming that you fall in the 30% tax bracket) and a 10% long-term capital gains tax.