Wednesday, September 5, 2012

DOs and DONTs for Stock Market Investors

The Indian Stock Market is one of the largest in the world in terms of volume of shares traded or the number of investors or even the value of money being invested/traded on a daily basis. However, the general investor population in India is still not too aware of the best practices or the practices to avoid while dealing with Stock Market Investments. The purpose of this article is a simple list of DO’s and DON’Ts for the layman investor…

Good Investor Habits – The DO’s

The following are some good habits or rather DO’s for Investor/Trader population.

1. Select a Certified/Trustworthy Intermediary

Selecting a Trustworthy Intermediary (The DEMAT Account Provider in layman terms) is extremely important. With the Indian stock market teeming with so many Trading Account providing firms, it is important that we choose one that has a good history of customer service and is trustworthy. The first thing to check is whether the Intermediary is registered with SEBI. The second thing to check is the documentation that you sign when you open a DEMAT/Trading Account. Make sure to read every section of the document and understand all the terms and conditions. This is a MUST to avoid unexpected surprises at a later point in time.

As a rule of the thumb, go for large and famous DEMAT providers. I cannot give any names here as it would mean endorsing their service but you can choose from the DEMAT Services provided by some of the biggest banks in India without much investigation because they have a performance/service baseline which is either good or excellent.

2. Always Validate the Trade Details

Whenever you make a transaction (Buy or Sell) the trading account provider will send us a Contract Note (Digital copy to our email) within the first 1 or 2 days of the trade being executed. Make sure to read the contract note thoroughly to validate the trade details like:
a. The number of shares bought/sold
b. The price at which the shares were bought/sold
c. The brokerage/commission charged

The first 2 items must match the transaction you placed and the 3rd must match the agreement that you signed in the previous section when you opened the DEMAT Account. As the owner of the account you have the right to refute any details in the contract note if it is incorrect.

3. Do your own Research

This is something that many of us either do not have the know-how or the time to do. But, it is a good habit. Always do some basic research to substantiate the trading (buy or sell) recommendation done by the brokerage house. In most cases the recommendation is backed by solid research (If given by a trusted brokerage house) which is explained in the pdf file that you receive. At least take some time to read through the recommendation before you actually buy or sell the mentioned stock.

An even better option would be to do some independent research – just do some Google to find out about the company better before you take the decision.

4. Be Realistic about Returns

This is probably the biggest or most important DO for any stock market investor. Be realistic about the returns. Stock market investments always carry an inherent risk which not many investors are aware of

The Indian Stock Market is known to give great returns of around 20-25% during good years. But, that is not guaranteed or possible every year. So, when someone makes a recommendation that says this share will double in 2 or 3 months, it is probably not true. Always expect realistic returns in the range of around 10-15% which is feasible in any market condition to avoid losses and disappointments…

The DON’Ts for the Stock Market Investor

In the previous section we covered the good habits or the Dos. The next is the DON’Ts which we must avoid. They are:

1. Don’t Share your Account Details with anyone

You may be wondering, what is someone going to do with my Trading Account details? It only has shares in electronic format, what is the worst someone can do?

The trading account is always linked to a bank account. Isn’t it? So, when someone knows your trading account details, he can invariably get his hands on your bank account details. Or, they may alter the account settings and connect their own bank account to the trading account and sell all your shares. Or, they may take loans against your share holdings and make away with the cash.

There are so many things that could happen if your account details end up in the wrong hands. So, be careful. Never divulge your account information to anybody (Unless you can trust them with your life)

2. Don’t give Money to someone else to Invest

This is one of the most common mistakes that people do. Giving their hard earned money to someone else to invest. You may trust the other person fully but there is a very real possibility that, the other person may be dishonest and claim that they lost all the money in the stock market. Or, they may not be too careful (since it is not their own money) and make bad investment choices and actually lose all your money. So, the best thing to do is, do your own research and do the buy or sell yourself. Be it profit or be it loss; let it happen due to your own decision.

If you feel you do not have the expertise or time to do share trading yourself, go via the Mutual Fund Route. We have so many well-managed and top performing mutual funds in India. Buy Mutual Funds where an expert is making the investment decisions on our behalf and hence you can at least trust the fact that they won’t be cheating you.

3. Don’t Believe Rumours or Free Advise

There is a saying, “The Only thing that you can get for free in this world is Advice” and there can’t be a better saying when it comes to the stock market. There is truckload of free advice about buying and selling shares. Friends, relatives, colleagues etc. Don’t believe everything you hear. A friend or a distant relative or an office colleague bought some XYZ share few months back and made a 100% profit in 2 months. That sounds like a compelling argument but, what is the guarantee that it will work out positively for you? Hear-Say investing is the biggest mistake novice investors do…

Around 7 – 8 years ago, when I started investing in the stock market my Uncle told me that he had bought shares of a company named “Kashyap Technologies” for around Rs. 6/- per share a couple of months back and the share has reached Rs. 10/- currently and is further expected to go up. Being the all energetic novice investor, the very next day and I went ahead and bought 100 shares of that company for around Rs. 10/-. After around 6 months the company’s share was trading at around Rs. 2/- and the company announced some stock splits/bonuses as well. Eventually after around 9 months from the date I purchased the share, I owned around 500 shares of that company which was worth around Rs. 200/-. Unfortunately ICICI Direct does not allow us to place any buy/sell transaction that is worth less than Rs. 500/-. So, I purchased shares of the same company worth Rs. 500/- and then sold the entire holding which was worth around Rs. 700/-

My Loss here was less than Rs. 1000/- but at that time it was almost 5% of my monthly salary and worked out to around 50% of my investment.

Some final words:

Investing in the Stock Market can be extremely rewarding or disastrous depending on the decisions we make. So, if you wish to protect or grow your hard earned wealth, it is important that you remember the DOs and DONTs and do what is best for you and your hard earned money.

Happy Investing!!!

Saturday, September 1, 2012

Rights of Shareholders

We all know what an equity share is. The owner of such a share is called a Shareholder. Let us say I buy 100 shares of ICICI Bank, I am a shareholder in ICICI Bank and own a part of the company. If we consider the overall number of shares that ICICI Bank has in the market right now, the 100 may seem like an insignificant number. But, nonetheless a share is a share. Someone who owns just 1 share of a company too is considered a shareholder in the company. So, as shareholders we have certain rights. The purpose of this article is to take a look at those rights that we possess…

The Rights that we have as Shareholders are:
1. Right to Profit
2. Right to Vote
3. Right to Information
4. Right to Benefits
Let us take a detailed look at each of these, one by one.

Right to Profit

Every individual who owns the shares of a public limited company, owns a part of the company, even if he owns just one or two shares. His first and foremost right is his entitlement to the profits made by the company. Go back to the example at the beginning of this article, me buying 100 shares of ICICI Bank, I cant just barge into the ICICI Head Office and demand a share in their yearly profit. So, the question that arises now is, how will I get my share of the profit?

Every year, most large and profitable firms declare something called a “Dividend”. This is a cash payment that is made on a “Per-Share-Owned” basis to every shareholder. For ex: If ICICI Declares a Rs. 10/- dividend per share this year, then as owner of 100 shares of ICICI Bank, I will get Rs. 1000/-. This is my share in the profits made by ICICI.

In years when a company does not declare dividends, then we cannot ask or demand any. But, usually well performing company’s declare dividends regularly. If a company declares a dividend today, then the money should reach all shareholders within a reasonable amount of time (Around 2 to 3 weeks) failing which you can contact the company to find out why you haven’t received it yet.

Right to Vote

Every shareholder has the right to vote in a company’s general body meeting that happens once or twice a year. No company can prevent them from doing so. The votes entitled to a shareholder corresponds to his/her owned number of shares in proportion to the overall shares of the company. However, an important point to note is that, the overall voting mechanism goes by majority. So, if 60% of the shareholders are ok with something the company has decided, the remaining 40% cannot force the company to change their decision.

Usually preference shareholders do not have any voting rights. Only the owners of common-shares have voting rights.

Many of the retail investors like you and me own a few hundred and at most a few thousand shares which will not even be worth 0.1% of the overall shares the company has. So, practically speaking the value of our vote is negligible. Nonetheless, we have the right to vote

Right to Information

As per the laws in India, every shareholder of a company has the right to receive the company’s annual report which contains details of the company finances. The Management of the company is supposed to act on behalf of the shareholders and in turn obliged to provide all the necessary information about the company to their shareholders.

Even if you own only a few shares of the company, you will receive their annual report.
Right to Benefits
The term benefits here is misleading. Per say, there are no direct benefits of owning shares of a particular company. However, you have the following rights:
a. Right to participate in any exercise by which the company raises capital – for ex: a Rights Issue
b. Right to Bonus Shares when declared
c. Right to participate in Share Buy-Back when the company opens up a buy-back offer.
d. Right to defend their rights – i.e., if the company tries to alter the rights of its shareholders, they have the right to challenge the decision.

You may be wondering by now that all these rights seem insignificant considering the size of majority of the company’s that offer shares in the stock market. But, at the end of the day, a right is a right. Even if it is only Rs. 10/- worth of dividend, it is your right and you must get it. So, know your rights and make sure that you get a fair share in the pie.

Happy Investing!!!
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