Stocks are units of ownership in a company. Buying a stock makes the buyer a part-owner, with a claim on the company's profits through dividends and on its growth through a rising share price. In India, stocks trade on the NSE and BSE through a SEBI-registered broker and are held in a demat account. Gains on listed shares held over a year are taxed at 12.5% above Rs 1.25 lakh. Shorter-term gains are taxed at 20%.
A stock, also called a share or equity, is a slice of a company. A company with 10 crore shares that sells 1 crore of them to the public has sold 10% of itself. Each buyer owns a tiny piece, votes at shareholder meetings in proportion to their holding, and shares in whatever the business earns. The words stock and share are used interchangeably in India. Strictly, a share is one unit and stock is the holding they add up to.
How investors make money from stocks
There are two ways. The first is a rising price. A share bought at Rs 500 and sold at Rs 700 gives a capital gain of Rs 200. The second is dividends, the cash a company pays out of its profit, usually once or twice a year. Over long periods, the price gain has been the bigger part of the return on Indian stocks. The Sensex has grown about 15% a year since its 1979 base before dividends. In any single year, though, a stock can fall by half or more. That is the trade-off: higher long-run return for higher short-run risk.
How stocks are traded
Stocks are bought and sold on the NSE and BSE between 9:15 am and 3:30 pm. An investor needs two accounts. A trading account with a broker is where orders are placed. A demat account with a depository is where the shares are held electronically. Most brokers open both together. Once an order is matched on the exchange, the shares arrive in the demat account the next working day under T+1 settlement. A beginner's walkthrough of the market is in the share market guide.
Types of stocks
Stocks are grouped in several ways. By size, into large, mid and small caps. By behaviour, into growth stocks that reinvest profits, value stocks that trade below what the business seems worth, and dividend stocks that pay out steadily. By how they ride the economy, into cyclical stocks such as autos and metals, and defensive ones such as FMCG and pharma. The full breakdown is in types of stocks.
How stocks are taxed in India
Gains on listed shares sold within 12 months are short-term capital gains, taxed at 20%. Shares held longer than 12 months give long-term capital gains, taxed at 12.5% on the amount above Rs 1.25 lakh in a financial year. Both rates date from the July 2024 Budget. Securities transaction tax is charged on every trade. Dividends are added to income and taxed at the slab rate. The rules for mutual funds differ slightly, and the whole picture is in LTCG tax on stocks and mutual funds.
Stocks for traders
A trader uses the same instrument differently. Intraday trades are bought and sold in the same session and never reach the demat account. Short selling, which means selling a stock not owned and buying it back lower, is allowed intraday in the cash segment. For holding a short position longer, traders use stock futures and options, which exist for around 200 of the most liquid stocks. Liquidity, meaning how many shares change hands each day, decides whether a stock is tradeable at all. A stock that trades a few thousand shares a day cannot absorb a large order without the price jumping.
FAQs
How many stocks are listed in India?
More than 5,600 on BSE and more than 2,200 on NSE, with heavy overlap. A few hundred of them account for almost all the trading.
What is the minimum amount to buy stocks?
The price of one share. Some stocks trade under Rs 10 and some above Rs 50,000, so there is no fixed minimum.
Can stocks go to zero?
Yes. If a company fails, its shares can become worthless, and shareholders are paid last in a liquidation.
What is the difference between stocks and mutual funds?
A stock is one company. A mutual fund is a pool of money that buys many stocks, managed by a fund house. The fund spreads risk and charges a fee for doing so.