Like any other investments, Income streams are very important to understand the viability of the investments. The same applies to the Equity investments as well.
AS the two sides of coin INCOME and OUTGO, I would like to put the total Outcome of Equity Investments under two Heads;
1) INCOME - Investment in equity, provides return by following means
a) Dividends - Based on their annual performances, Companies declares dividends. Some companies declare annual dividends, once in a year after their Board's AGM (annual general meetings). Some companies declare Dividends as Interim dividends in the middle of the year also and declare the final dividend after their AGM. These dividends are credited to share holders' bank accounts through ECS. Mostly in the present times ECS is received directly in the bank account. This process saves time and the transactional losses which were quite normal in the earlier times when the Dividend cheques were sent through snail mail.
Profitable companies declare dividends out of their surplus profits. To declare dividend is not mandatory for the companies, they do it out of the idea of having good value in the share markets, which helps attract investors and bankers for funds. The companies can declare dividends to any extend as the management wants, like TCS in the past has declared dividends in the tune of 2000%. The amount in dividend what a investor gets is the declared percentage on FACE VALUE of the Share.
b) Difference Gained in trading shares - Buying shares at Lower prices and selling them at higher prices. This critical component of trading - to enter at right time and exit at the peak time. (will discuss in subsequent posts).
a) Bonus Issues- Sometimes companies in their AGM declares additional benefits to the existing shareholders in form of Bonus Shares. Proportion of bonus shares as approved by the company board. Here the Share holder is not required to pay any thing for these additional shares and these shares are credited/allocated in his demat account.
b) Rights Issues- Sometimes companies in their AGM declares benefits to the existing shareholders in form of Rights Shares. Proportion of right shares as approved by the company board. Here the Share holder is required to pay price of these shares. The advantage of rights share is that they are offered at discounted price. Only the existing share holders can buy these Rights share.
c) Shares Split - Companies announce to split shares into smaller face value denominations.
2) OUTGO - Like any business, expenses are there for the Equity investments;
i) Brokerage - Commission paid to agent for trading in the stock market. As trading can be done only through Stock market authorised agents.
ii) Demat Account Charges - Banks charges for maintaining the Demat Accounts with them.
iii) Taxes on Equity Transactions - For every transaction of equity trading on stock market, service tax and Transaction Tax is required to be paid to Government.
iv) Income tax - Based on the period of Holding of equity teh gains are classified under two heads
a) SHORT TERM GAINS - If the period of holding of equity is less then 1 Year - Short term Gains are considered and a Tax is required to be paid which is around 20 %.
b) LONG TERM GAIN - If the holding period of the equity extends beyond 1 year then the gains arising out of transaction is considered as Long term Gain - Long term gains are exempted from Tax.