1:31:52
Basics Of Stock Market for Beginners Lecture 3 by CA Rachana Ranade
CA Rachana Phadke Ranade
Overview
This lecture, the third in the series on stock market basics, clarifies the numbering of previous lectures and provides crucial updates on dividend taxation laws. It revisits concepts like capital gains, face value, and stock splits, while introducing new topics such as bonus shares, the primary and secondary markets, and the mechanics of trading accounts and contract notes. The speaker emphasizes the importance of understanding market forces like demand and supply and the role of regulators like SEBI in ensuring fair practices.
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Chapters
- This is the third lecture in the stock market basics series, despite potential confusion with numbering due to previous uploads.
- The dividend taxation law has changed: previously, dividends up to ₹1 lakh were tax-free, but now even ₹1 of dividend income is taxable.
- For Long-Term Capital Gains (LTCG), the first ₹1 lakh of gains are exempt from tax annually.
- Both dividend income exceeding the exemption and LTCG exceeding ₹1 lakh are taxed at a special rate of 10%, irrespective of the investor's income bracket.
Understanding these clarifications and tax updates is crucial for accurate financial planning and compliance, as outdated information can lead to incorrect tax calculations and potential penalties.
Previously, if an investor earned ₹11 lakh in dividends, only the ₹1 lakh above the ₹10 lakh exemption was taxed. Under the new law, even ₹1 of dividend income is taxable.
- Physical share certificates are like bound books with perforated leaves, where a larger part goes to the shareholder and a smaller part is retained by the company.
- The face value of a share (e.g., ₹10) is printed on the certificate and represents its nominal value, not its market price.
- Stock splits (e.g., a ₹10 face value share becoming two ₹5 face value shares) do not change the total value of the holding but adjust the number of shares and face value per share.
- Top-line refers to a company's revenue or turnover, while bottom-line refers to its profit.
Reviewing these foundational concepts reinforces understanding of how shares are represented and valued, which is essential before delving into more complex investment mechanisms.
A share certificate with a face value of ₹10, if split, would result in new certificates with a face value of ₹5 each, with the number of shares doubling to maintain the overall value.
- Bonus shares are essentially free shares issued by a company to its existing shareholders, often in a specific ratio (e.g., 1:1 means one bonus share for every share held).
- When bonus shares are issued, the market price per share typically drops proportionally to maintain the overall market capitalization, similar to a stock split.
- The 'cum-bonus' price is the price before the bonus issue, and the 'ex-bonus' price is the price after the bonus issue, which will be lower.
- Share prices are primarily determined by market forces of demand and supply, not by any single entity; high demand with low supply increases prices, and vice versa.
Grasping the mechanics of bonus shares and the influence of demand and supply helps investors understand how corporate actions affect share prices and how market sentiment drives value.
If a company declares a 1:1 bonus and the share price was ₹1000 before the bonus, after the bonus, the price would theoretically drop to ₹500 per share, as the investor now holds double the number of shares.
- The primary market is where companies issue new securities directly to investors for the first time, typically through an Initial Public Offering (IPO).
- The secondary market, like the stock exchanges (BSE, NSE), is where investors trade existing securities among themselves after they have been listed.
- In the primary market, transactions are between the issuing company and the investor; in the secondary market, transactions are between investors.
- Companies like Patanjali, if they plan to go public, would first enter the primary market via an IPO before their shares are traded on the secondary market.
Distinguishing between the primary and secondary markets is fundamental to understanding how companies raise capital and how investors buy and sell shares in the market.
When a company like Patanjali launches an IPO, investors buy shares directly from the company in the primary market; subsequently, these shares are traded between investors on exchanges like the BSE or NSE in the secondary market.
- To trade in the stock market, investors typically need three accounts: a savings bank account for funds, a demat account to hold shares electronically, and a trading account to execute buy/sell orders.
- The trading account acts as a gateway to place orders on the stock exchange, while the demat account is the repository for the shares themselves.
- A 'three-in-one' account offered by some banks integrates savings, demat, and trading facilities, simplifying the process.
- Investors can have multiple demat accounts, and their trading and demat accounts can be with different entities (e.g., bank for savings, a separate broker for trading/demat).
Understanding the function of demat and trading accounts is essential for anyone wanting to participate in the stock market, as these are the operational tools for investing.
A trading account allows you to place an order to buy shares of SBI, and once the transaction settles, those SBI shares are stored in your demat account.
- A contract note is a legally mandated receipt issued by a broker to an investor within 24 hours of a trade, detailing the transaction (buy/sell, quantity, price, date).
- It serves as proof of transaction and is crucial for tracking trades and resolving disputes.
- Investors must ensure their email addresses and mobile numbers are updated with their brokers and exchanges to receive contract notes electronically (via email or SMS).
- SEBI, the market regulator, enforces rules like the issuance of contract notes to protect investors and ensure market integrity.
Knowing about contract notes empowers investors to verify their transactions, prevent fraudulent activities by brokers, and understand their rights and responsibilities.
If you buy shares of L&T on February 8th, your broker must send you a contract note by February 9th detailing the trade, which you should review for accuracy.
Key takeaways
- Dividend income is now fully taxable, regardless of the amount, a significant change from previous tax laws.
- Long-term capital gains up to ₹1 lakh are tax-exempt annually, with gains above this threshold taxed at a special 10% rate.
- Bonus shares and stock splits increase the number of shares held but do not inherently increase the investor's total wealth; they primarily make shares more affordable and accessible.
- The primary market is for new security issuances (like IPOs), while the secondary market is for trading existing securities between investors.
- A demat account holds your shares electronically, and a trading account is used to place buy/sell orders; these are distinct but interconnected for trading.
- Always verify your trades through the contract note, which brokers are legally required to provide within 24 hours, to ensure transparency and prevent fraud.
- Market prices are driven by the fundamental economic principles of supply and demand.
Key terms
Dividend TaxationLong-Term Capital Gains (LTCG)Face ValueStock SplitBonus SharesPrimary MarketSecondary MarketIPO (Initial Public Offering)Demat AccountTrading AccountContract NoteSEBI (Securities and Exchange Board of India)Demand and Supply
Test your understanding
- How has the tax treatment of dividend income changed, and what is the implication for investors?
- What is the difference between the primary market and the secondary market, and through which market would you buy shares during an IPO?
- Explain the roles of a demat account and a trading account in the stock market.
- Why is it important to review your contract notes, and what is the regulatory requirement regarding their issuance?
- How do bonus shares and stock splits affect the market price of a stock, and what is the underlying principle driving these changes?