For the purposes of writing this series, I have assumed that the reader is not having a large capital base as, given the current scenario, an average person would find it hard to release funds that can be used for trading / Investing.
Tax definition of Trading & Investing
In a very simple manner, the key difference between Trading and Investing can be explained in the following manner ---
Trading gains would be considered as business income for a trader or as a short-term capital gain for an investor attracting the applicable income tax rate.
Investing gains would be considered as long-term capital gains attracting a lower rate of income tax.
So if I invest in 100 Shares of Reliance at 2100 and sell it within 10 days at 2300, I would end up making a short-term capital gain of 100*200 = 20,000 if trading is not my business income. And I would end up making a taxable income of 20,000 if trading was part of my business income.
Now, if I sell the shares bought above after 367 days at 1950, I would end up incurring a business loss of 100*150 = 15,000 if trading was part of my business income. However, I would end up incurring 15,000 as a long-term capital loss if I was not a trader and trading was not part of my business income or I was a salaried person.
Why look at IPOs?
Historically, IPOs have attracted lots of retailers as on many occasions, they have offered bumper listing gains and the retailers would generally seek quick and riskless gains from the investments made.Logically, the words “ quick and riskless” do not go hand in hand and certainly not with an “investment”. The reason being that investments tend to be for a longer period of time than other means of savings or money-making.
In my view, for a retail person, with limited means to risk their precious capital, IPOs generally offer a good way to start the Investment journey. SEBI has made IPO investments an affordable process for the retail category as the lot size or the minimum amount that one can invest is around 15,000. One can always apply for multiple lots but if I cannot afford more than 15,000, IPO is the best way to go forward.
The major downside of an IPO is that the information related to the company and its financials is available only as part of the prospectus which has to be filed. And retailers would not be having the time as well as the required knowledge to understand, interpret and evaluate the same. Also, would it make time sense to spend a few days or at least a few hours for an investment that may or may not click per expectations? I do not feel so.
With IPOs, there is a 50-50% chance of it being a success on the expected lines.
My experience has not been very encouraging as I have rarely been one of the allottees of the IPOs and when I did get allotment for ICICI PRU LIFE, this is what happened --
Listing Day Trading Information
.
IPO Price
Open
Low
High
Last Trade
Volume
BSE
₹334.00
₹329.00
₹295.50
₹333.90
₹297.65
12,720,399
NSE
₹334.00
₹330.00
₹295.15
₹333.90
₹297.55
89,058,658
The IPO base price was 334 and listed at 330 and closed at 297 - a fall of 11 % on a listing day. The day happened to be a big news day when around mid-morning, the news of the surgical strike was made public and the markets had tanked.
The outcome was that the morning excitement of witnessing a listing gain faded with the gloom of a sharply discounted closing price. I ended up holding it for quite some time and made the typical mistake of exiting just above my cost. From the chart, it is very clear what followed thereafter was a steady rise and I would have been better off had I been an investor than a trader.
Then What Should I do?
Over the last few years, I have become somewhat wiser in dealing with lottery allotments as and when I get. The last was with Nazara Tech. I applied only because of RJ backing and hoped that it would get listed at a good premium.
I was lucky this time and got an allotment . When the day had come, I had already decided that if the listing is at a good premium, I will take my capital out and let the shares representing the profits made remain in my holdings for as long as I can.
So when it got listed at a super-premium and then made a high of 2024, I decided to exit around 1950 but by the time I could place the order and got filled, I got the exit price as 1920. A gain of = 65% just for parking my funds for about 2 weeks! That is certainly not bad. My capital was made free on the day of the listing and which I use as and when I feel to use it for the next IPO - it is now going to be Zomato.
So in this case, my 65% gain would be treated as my business income as I am a full-time trader and if I am able to hold on to my profit based holdings in Nazara for another 260+ days, then I would be eligible to claim any gains out of if as a long term capital gain. As of 09-07-12, the lowest price was 1432 - a good 272 away from my cost price, and assuming I exit at 1432 in the future, I would have earned another 23% gain over the 65% gain which I am holding in the form of Nazara shares.
This is how I propose to manage other IPOs . So my next try would be for Zomato. A lot is being said about it - good/bad. I am going to ignore both the views and apply and see if I get an allotment and if I get allotted, I will have to think about what to do when it gets listed and at what price. Why worry about something that is nowhere in sight?
I hope the above helps you get an idea about how you can make a beginning in the world of “Investing” in the simplest possible manner.
I would love to read your views and experience about IPOs.
Thank you for your time and Happy Investing!
Umesh
P.S. Disclaimer - The views expressed here are purely for educational and informational purposes only and not a recommendation or advice in any manner. I am not a SEBI regd., so please consult your financial advisor or be your own decision-maker as you may deem fit.
Tax definition of Trading & Investing
In a very simple manner, the key difference between Trading and Investing can be explained in the following manner ---
Trading gains would be considered as business income for a trader or as a short-term capital gain for an investor attracting the applicable income tax rate.
Investing gains would be considered as long-term capital gains attracting a lower rate of income tax.
So if I invest in 100 Shares of Reliance at 2100 and sell it within 10 days at 2300, I would end up making a short-term capital gain of 100*200 = 20,000 if trading is not my business income. And I would end up making a taxable income of 20,000 if trading was part of my business income.
Now, if I sell the shares bought above after 367 days at 1950, I would end up incurring a business loss of 100*150 = 15,000 if trading was part of my business income. However, I would end up incurring 15,000 as a long-term capital loss if I was not a trader and trading was not part of my business income or I was a salaried person.
Why look at IPOs?
Historically, IPOs have attracted lots of retailers as on many occasions, they have offered bumper listing gains and the retailers would generally seek quick and riskless gains from the investments made.Logically, the words “ quick and riskless” do not go hand in hand and certainly not with an “investment”. The reason being that investments tend to be for a longer period of time than other means of savings or money-making.
In my view, for a retail person, with limited means to risk their precious capital, IPOs generally offer a good way to start the Investment journey. SEBI has made IPO investments an affordable process for the retail category as the lot size or the minimum amount that one can invest is around 15,000. One can always apply for multiple lots but if I cannot afford more than 15,000, IPO is the best way to go forward.
The major downside of an IPO is that the information related to the company and its financials is available only as part of the prospectus which has to be filed. And retailers would not be having the time as well as the required knowledge to understand, interpret and evaluate the same. Also, would it make time sense to spend a few days or at least a few hours for an investment that may or may not click per expectations? I do not feel so.
With IPOs, there is a 50-50% chance of it being a success on the expected lines.
My experience has not been very encouraging as I have rarely been one of the allottees of the IPOs and when I did get allotment for ICICI PRU LIFE, this is what happened --
Listing Day Trading Information
.
IPO Price
Open
Low
High
Last Trade
Volume
BSE
₹334.00
₹329.00
₹295.50
₹333.90
₹297.65
12,720,399
NSE
₹334.00
₹330.00
₹295.15
₹333.90
₹297.55
89,058,658
The IPO base price was 334 and listed at 330 and closed at 297 - a fall of 11 % on a listing day. The day happened to be a big news day when around mid-morning, the news of the surgical strike was made public and the markets had tanked.
The outcome was that the morning excitement of witnessing a listing gain faded with the gloom of a sharply discounted closing price. I ended up holding it for quite some time and made the typical mistake of exiting just above my cost. From the chart, it is very clear what followed thereafter was a steady rise and I would have been better off had I been an investor than a trader.
Then What Should I do?
Over the last few years, I have become somewhat wiser in dealing with lottery allotments as and when I get. The last was with Nazara Tech. I applied only because of RJ backing and hoped that it would get listed at a good premium.
I was lucky this time and got an allotment . When the day had come, I had already decided that if the listing is at a good premium, I will take my capital out and let the shares representing the profits made remain in my holdings for as long as I can.
So when it got listed at a super-premium and then made a high of 2024, I decided to exit around 1950 but by the time I could place the order and got filled, I got the exit price as 1920. A gain of = 65% just for parking my funds for about 2 weeks! That is certainly not bad. My capital was made free on the day of the listing and which I use as and when I feel to use it for the next IPO - it is now going to be Zomato.
So in this case, my 65% gain would be treated as my business income as I am a full-time trader and if I am able to hold on to my profit based holdings in Nazara for another 260+ days, then I would be eligible to claim any gains out of if as a long term capital gain. As of 09-07-12, the lowest price was 1432 - a good 272 away from my cost price, and assuming I exit at 1432 in the future, I would have earned another 23% gain over the 65% gain which I am holding in the form of Nazara shares.
This is how I propose to manage other IPOs . So my next try would be for Zomato. A lot is being said about it - good/bad. I am going to ignore both the views and apply and see if I get an allotment and if I get allotted, I will have to think about what to do when it gets listed and at what price. Why worry about something that is nowhere in sight?
I hope the above helps you get an idea about how you can make a beginning in the world of “Investing” in the simplest possible manner.
I would love to read your views and experience about IPOs.
Thank you for your time and Happy Investing!
Umesh
P.S. Disclaimer - The views expressed here are purely for educational and informational purposes only and not a recommendation or advice in any manner. I am not a SEBI regd., so please consult your financial advisor or be your own decision-maker as you may deem fit.
