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Six styles of making money in the Stock Market.

Profit is the ultimate motive of the person involved in any business. The share market is seen as an ocean of opportunities to make money based on tip, risk, emotion & luck.

As said in the famous dialogue of SCAM 1992 ”

शेयर मार्टेक इतना गहरा कुंआ है, जो पूरे देश की पैसे की प्यास बुझा सकता है। मैं इस कुएं में डूबकी लगाना चाहता हूं।

ये मार्केट का मसाला चार चीजों से बनता है। पहला टीप- ख़बर, इनसाइडर इनपुट। उसमें थोड़ा रिश्क मिला दो। रिश्क जितना ज्यादा, मार्केट का मसाला उतना ही तीखा। इस मिलावट में थोड़ी भावना डाल दो। और इसमें ही थोड़ा लक डाल दो। बन गया मार्केट का मसाला।’

रिश्क है, तो इश्क है!

A person can make money from the share market in different ways. The most common six ways to make money in the share market as listed below: –

1. Investment (Short term capital gain & Long term capital gain)

When a person chooses to buy some shares with the intention to hold them for a few days to a few years, this is understood as an investment in the share market. But when a person buys and sells shares on the same day, it is known as intraday trading. When shares are bought for investment, money is debited from our trading account immediately and we get the delivery of these shares in our Demat account on T+2 days. These shares are kept in Demat, like assets for the period of investment. If the shares price increases over the period of investment and the owner decide to sell these stocks. The investor may place a sell order through his broker and on T+2 day, the settlement is done and shares got debited from the Demat account, and money (sales consideration) gets credited to our trading account. We can transfer money from our trading account to our bank account.   Hence if an opportunity is found for a few days of investment we can make money by investment. If these shares are sold after one year then the profit is known as “Long term capital gain” But if these shares are sold before one year then the profit is known as “Short term capital gain”.

At the time of making an investment (buying shares), the investor is required to pay the full value of the shares. Hence Investment requires more capital than trading.

Please note that LTCG from listed equity shares was exempt upto 31st march 2018. But w.e.f. 1st April 2018, long-term capital gain (only above Rs. 100000/-) from equity shares is taxable @ 10% and short-term capital gain from equity shares is taxable @ 15%.

2. Equity Intraday Trading (Speculative business income)

To make money from the intraday price movement of shares, a person may decide to buy & sell shares on the same day, it is known as intraday trading. For intraday trading, traders need not pay the full purchase value but to pay only the margin value in the trading account. Margin value is different for different shares. Hence in intraday trading, by using a small margin traders can trade (buy & sell) in a share value of many folds. Delivery of shares is not taken in intraday trading and the difference between buy value and sell value is settled in money on the same day. Intraday trading requires good knowledge of trading tools otherwise traders may have to bear huge losses.

Earning from intraday trading is treated as income from speculative business and taxable as per slab rate as business income after deduction of business expenses.

3. Derivative Trading (Business income from Futures & options)

A derivative is a financial instrument that drives its value from an underlying asset i.e. equity share in the case of F&O. Futures & options are the derivative instruments and their value is derived from the respective share price. Futures & options can be traded separately or in combination under a trading strategy. Futures & options are also used as an important hedging tool for share market investors and traders.

All listed securities are not available for derivative trading. Only selected securities are made available for F&O trading. Currently, a futures contract is made available on 194 securities by SEBI. The stock exchange may impose an F&O ban on a security when the stock’s aggregate open interest crosses 95 percent of the market-wide position limit. Futures and options are traded in lots. A lot size of is decided by SEBI for F&O trading. For example, SBI lot size is 1500 shares and if the market price is 600 then the lot value comes Rs. 900000/-. Fractional lots are not traded in F&O. In India, F&O contracts expire on the last Thursday of each month. Weekly F&O is available only in index trading. Traders need not pay full lot value but only margin value which may vary from 3% to 25% depending on the risk level of the selected security. F&O contacts provide an opportunity to short-sell when a trader predicts the downfall in share prices. F&O contracts can be traded for the next three months.

If a trader predicts the short-term rise of the share price of SBI and wants to take up this opportunity. then there are the following ways:-

  • Invest in equity shares at market price (for example 1500 shares @ 600, it requires rs. 900000/-)
  • Buy Future contact of SBI for lot of 1500 shares @ 600 and roll over till opportunity availed. (It requires a margin of approx Rs. 180000/-)
  • Buy equity shares of SBI for intraday (1500 shares @ 600, it requires a margin of approx Rs. 180000 But this transaction is crossed on the same day. This is useful only for availing of same-day opportunities.
  • But the call option of the current month by paying a small premium ( same lot size of 1500 shares) and before the expiry of the current month (last Thursday of the current month), shift to the next month’s call option.

Earning from F&O trading is treated as business income and taxable as per slab rate as business income after the deduction of business expenses.

4. Margin Funding (capital gain/business income)

Margin funding is a short-term loan facility that may be availed by a trader to take up the opportunity even in case of lack of margin. This facility is made available by the broker at a specified rate of interest. If an investor/ trader wants to trade in security but he does not have enough margin to complete the transactions then his broker may allow him to go ahead with the transaction by using a margin funding facility. If the right opportunity is availed at right time then the trader may make a good profit even after paying interest for the margin funding.

5. Dividend Income (Income from other sources)

An investor who decides to hold a security may earn by the way of dividends. That part of the profit of a company that is distributed to its shareholder is known as Dividends. Those shareholders who hold the security on the record date (as decided by the company) are entitled to the dividend. Some public sector companies pay high dividends with dividend yields upto 12 like Coal India Ltd. , Rec ltd., PFC ltd, NALCO etc.

Please note that upto FY 2019-20 (AY 2020-21), dividend from the domestic company (upto Rs. 10 lakh) was exempt in the hands of shareholders u/s 10(34) of the Income-tax Act. But w.e.f. 1st April 2020, the Dividend is made fully taxable in the hands of shareholders.  

6. Arbitrage Trading (Capital Gain/business income)

Arbitrage trading takes benefit of small differences in the price of identical assets in different markets. The arbitrage trader buys the assets in the market at a lower price and sells them in the market at a higher price. Such transactions make the price of the identical assets equal in both markets and then the trader settles his positions in both the markets.

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