Tax on profits made in shares

There is no tax on dividend.

When you sell any asset you own (house, land, shares, mutual fund units, gold, debentures, bonds), and you make a profit on the sale, it is known as capital gain.

If you sell your shares after a year, the profit you make is referred to as long-term capital gain. There is no tax on long-term capital gain.

If you sell it within a year of buying, it is referred to as short-term capital gain and taxed at 10% of the profit made.

How shares reward an investor?

If you are a shareholder you can benefit in two ways : capital appreciation and divedend.

Dividend

Usually, a company distributes part of the profit it earns as dividend.
Say a company earned a profit of Rs 1 crore (Rs 10 million) in 2005-06.
It keeps half that amount within the company. This is used for a variety of purposes -- buying more machinery, land or raw materials, building a new factory or setting up a new office. It could even be used to repay loans.
The other half is to be distributed as dividend.

Assume the company has 100000 shares. This would mean half the profit -- ie Rs 50 lakh (Rs 5 million) -- would be divided by 100000 shares.
So each share would earn Rs 50. The dividend would then be Rs 50 per share.
If you own 100 shares of the company, you get a cheque of Rs 5000 (100 shares x Rs 50) from the company.

Capital Appreciation

When the company issues shares, it gives a basic value to each share -- say Rs 10. This is called the face value of the share.
When the share is traded at the stock market, however, this value may go up or down, depending on the supply and demand for the stock.
The value of a share in the market at any point of time is called the price of the share or the market value of a stock.
A share with a face value of Rs 10, may be quoted at Rs 100 (higher than the face value), or even Rs 5 (lower than the face value).

If you buy a stock for Rs 10 and sell it for Rs 20 after a year, your return from that stock is Rs 10, or 100%.
Or if you buy a stock for Rs 10 and sell it for Rs 9, you lose Re 1, or your loss is 10%.

Fundamental versus Technical Analysis of Shares

Fundamental stock analysis requires, among other things, a close examination of the financial statements for the company to determine its current financial strength, future growth and profitability prospects, and current management skills, in order to estimate whether the stock's price is undervalued or overvalued.

Technical analysis is the evaluation of shares by means of studying statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value but instead use stock charts to identify patterns and trends that may suggest what a stock will do in the future.

In the world of stock analysis, fundamental and technical analysis are on completely opposite sides of the spectrum. Earnings, expenses, assets and liabilities are all important characteristics to fundamental analysts, whereas technical analysts could not care less about these numbers. Which strategy works best is always debated.I personally analyse shares using a mix of fundamental and technical analysis.

What are shares?

There are a number of different shares you can buy, including preference shares, bonds, and gilts but the most popular type is the ordinary share. Ordinary shares simply represent ownership of a company.

So, when you buy shares, also known as equities or stocks, you literally become a part-owner of that business.

Companies do not have to list on the stock market to issue shares. Many businesses start life with friends and family as shareholders. These businesses are called unlisted firms and their shares are often referred to as ‘unquoted’.

Once a company decides to raise money from the general public it is called a Public Limited Company (Plc) and is a ‘listed firm’. Its shares are then referred to as ‘quoted’ or ‘listed’ on the stock market.

As a shareholder you have a say in the company’s affairs by voting at company meetings and, of course, the ability to share in its fortunes. If the company does well, the value of your investment should rise but if it does badly, you could see your shares fall in value.