Before investing in direct equities, it is critical to evaluate your risk appetite and return expectations as the stock market is often driven by greed, fear and irrational behaviour which may dent the best-laid investment plans
By Adhil Shetty
The pandemic and its economic effects have brought new investors to the equity market. In May, SEBI reported that 4.9 million new demat accounts had been opened during FY20, a 22.5% increase year-on-year. A demat account is required for direct investment in stocks. The trend indicates that investors are now more confident about direct equity investing. There are many reasons for this spike. Largely, the interest is driven by a steep fall in the market earlier this year which provided deeply discounted investment options for first-time customers. If you are also planning to jump on to the bandwagon, know these five important things about investing in equities.
Cost of demat account
For investing directly into equities, you are first required to open a trading and demat account through a stockbroker. You would need an image of your PAN card and a cancelled cheque, and Aadhaar details. Account opening may cost you `200-`500, which often includes demat account charges for the first year. Some brokers offer free account opening along with zero demat charges for the first year.
Currently, flat brokerage is popular among investors. In it, the broker levies a fixed charge per scrip regardless of the number of scrips in intraday trade while charging zero or minimal brokerage for delivery-based transactions. For example, if you bought 200 stocks in company ‘X’and squared them off the same day, the broker will charge a fixed amount, say `20 (excluding taxes and charges levied by exchange). If you didn’t square off the shares and carried them to the next day, the broker might charge you a minimal brokerage, which is nearly zero when you sell that scrip. However, you have to pay the exchange charges and taxes as applicable.
Brokerage may also be charged as a fixed percentage of your trade. Traditional or old broking companies use this system in which you pay a fixed percentage of your intraday or delivery trade as brokerage. For example, a broker may charge 0.02% -0.05% for intraday trades and 0.2%- 0.5% for delivery. If you make large trades, percent brokerage will prove costly.
Before you open an trading and demat account with any broker, check the account opening charges, annual fixed charges, demat charges, brokerage structure, quality of trading platform the broker offers, quality of back-office support, background of the broker, and ease of account opening while fully compliant with regulations.
Do your research
If your broker has a good research wing, it can help you identify stocks that can perform well in the short or long term. Access to first-hand reports can give you an edge over investors who invest merely on instinct. Despite all the research reports and ideas you may get from your broker and other sources, do your own stock research regularly. With time, you’ll start picking up information quickly, read the company results accurately, and sense market movements.
Long-term investments are often safer than short-term trades. Short-term trades are usually ones where you square off positions within a year.If you carry them for more than one year, they are called long-term. If you have enough time to track your shares, have a high risk appetite, and know how to research your options, you may start short-term trading. Apply strict stop-losses and avoid trading beyond your risk appetite. Long-term equity investing offers a great chance to earn an attractive return and keep you safe from day-to-day volatility.
Assess your risk
Before you invest in direct equities, it’s crucial to evaluate your risk appetite and return expectations because the stock market is often driven by irrational behaviour, fear, and greed which may dent the best-laid investment plans. Information-backed decisions are key. Avoid pouring fresh money into stocks that are not going to recover. Conversely, if you’ve achieved your targets, book your profits and exit a stock.
Diversify your portfolio
Never put all your money in one stock option. Portfolio diversification is required to optimise risks and rewards. Diversify your investments across different sectors. Avoid following tips from unregistered stock advisors. Be aware of your financial limits. Don’t gamble with your life savings because the risks are very high.
(The writer is CEO, BankBazaar.com)