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Equity Investments

The equity market is a marketplace for traders and investor where they buy or sell stocks. Investors can invest in public or private stocks. Public stocks are traded on exchanges, unlike private stocks which are traded privately. Initially, when an organization is set up it is private and later it goes on to launch its IPO. IPO launch makes the private company available for public investors. Whereas private stocks of a company are available to limited investors like employees or other specific traders.

Types of equity trading:

  • Scalping – Scalping is trading that involves buying and selling of equity within seconds or minutes. Also referred to as micro trading, scalping attempts to make its profits off small price changes. A scalper typically places hundreds of trades every day intending to cash in gains from minute price differences. Since this requires a lot of attention and skill, beginners should exercise caution while executing such trades. Scalping also requires the trader to be strict with their exit strategy as one substantial loss could overtake the many small wins obtained in a day.
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  • Day trading – Day trading, as the name suggests, is any buying and selling carried out within the same trading day. Unlike scalping, which occurs within seconds or minutes, day trading takes place until the market closes on the same day. Traders who trade in this capacity are often skilled investors who are well-educated in this field and have enough time to spare to monitor stock markets throughout the day. Day trading is usually carried out to capitalize on small price movements by using high amounts of leverage.
  • Swing trading – Swing trading is based on the price fluctuations in the market. Though this is also a type of short-term trading, it’s different from day trading as traders close trades within few days to several weeks. Experts view swing trading as the middle ground between day trading and long-term investing. Investors use technical analysis and execute swing trading to capture a significant portion of a potential price move.
  • Position trading – Position trading is to hold a position open for a more extended period with the expectation that its value would appreciate or depreciate. This type of trading can be carried out for weeks to months, thus making it easier for traders who cannot frequently trade to get on board. Position trading is also referred to as “trend followers” because its core belief is that once a trend starts, it’s likely to continue. Position trading is the exact opposite of day trading, as its goal is to profit from the move in the primary trend rather than minor price fluctuations.
  • Long term trading – Long-term trading refers to positions held by investors for months or years. Long-term trading is complex and needs to consider the potential value of the underlying stock before holding a position. This trading on equities is also known as “buy-and-hold” trades, as against “buy-and-sell” trades. Investors undertake this type of trading with the goal of sustained gains to benefit from the unrealized value in the underlying stock.

Things to know before you trade in equity:

  • Never go against the sentiment of the equity market today – The trend is your friend. Unless you are 100% sure, do not try to take totally contrarian bets. When you go against the tide, the risk factor increases.
  • Buy low, sell high – You should try to buy stocks that are trading at historically low prices and cheap valuations. When you buy such stocks, you can gain when the equity makes the next up move.
  • Think long term – In the short term, nobody can predict what the equity market will see next. So, it’s important to have a long term view on trades that you do.
  • Know-how about intraday trading – Before you jump into the stock market bandwagon by listening to random tips, it would be better to know how to do intraday trading for better results with your trades and investments.
  • 1000 stock is not expensive and Rs. 5 stock is not cheap – Some investors approach equity investing in the same way they buy clothes or vegetables. They seem to think if a stock is priced at Rs. 1000 it is costly than a stock that is Rs 100. Use valuations to understand exactly what is cheap and what is expensive.

Taxation on Equity Investments

Whenever you are investing or trading in the stock market, you need to pay taxes on your gain. We can classify the gain from equity markets in the following categories:

  • Long-Term Capital Gain (LTCG): Any profit or gain from equity investments is considered as long-term capital gain, if your holding period is more than a year. LTCG up to Rs. 1 lakh from equity investments in a financial year is exempted from tax. Any gain above Rs. 1 lakh is taxed at 10%.
    Until FY 17-18, LTCG tax on equity was zero. In the Union Budget of FY 18-19, a grandfather clause was introduced. As per this clause, for all stocks sold after February 1, 2018, the acquisition cost for computing capital gains would be considered as higher than the actual purchase price or the highest price quoted on the recognized stock exchange as on January 31, 2018.
    In case of unlisted stocks, LTCG tax rate is 20% with indexation and the holding period needs to be more than two years to qualify for LTCG.
  • Short-Term Capital Gain (STCG): Any profit or gain from equity investments is considered as short-term capital gain, if your holding period is equal to or less than a year. STCG is taxed at flat rate of 15%.
  • Intra-day trading (Speculative business income): As per Income tax section 43(5), profits earned by trading equity or stocks for intra-day or non-delivery are categorized under speculative business income. The gain on this type of income is added to your income and taxed as per your tax slab.
  • Dividend taxation: From FY 20-21, all dividends in the hands of investors are taxable as per slab rates. In other words, dividend income will be added to your income and taxed as per your income tax slab.
  • Carry forward and set off of capital loss: In an equity investment, capital gains are taxed as mentioned above but losses can also be adjusted. Long-term capital losses can be set off only against LTCG and short-term capital losses are allowed to be set off against both LTCG and STCG. There is also a provision to carry forward losses if you are unable to set off your entire loss in the same financial year. Both short-term and long-term capital losses can be carried forward for eight assessment years immediately following the assessment year in which the loss was first computed.