Got your first paycheck and can't wait to buy your first lot of shares?
Hold on!
Before you start investing in the stock market, you have to get certain basics in place.
Follow this checklist to ensure you are on track.
1. Get a broker
People like you and me cannot just go to a stock exchange and buy and sell shares.
Only the members of the stock exchange can. These members are called brokers and they buy and sell shares on our behalf.
So, if you want to start investing in shares, you can do it only through a broker.
Every stockbroker has to be registered with the Securities and Exchange Board of India, which is the stock market regulator.
You can either choose a broker (who is directly registered with SEBI) or a sub-broker (people licensed by brokers to work under them).
The Bombay Stock Exchange directory or the National Stock Exchange Web site will give you a list of brokers affiliated to them. Most of them entertain retail clients.
If you want an online broker, you can start by looking at the Web sites of some well-known online players: Sharekhan, Kotak Securities, ICICI Direct, 5paise and India Bulls.
2. Get a demat account
Gone are the days when shares were held as physical certificates.
Today, they are held in an electronic form in demat accounts.
Demat refers to a dematerialised account.
Let's say your portfolio of shares looks like this: 40 shares of Infosys, 25 of Wipro, 45 of HLL and 100 of ACC.
They will show in your demat account. You don't have to possess any physical certificates showing you own these shares. They are all held electronically in your account.
Periodically, you will get a demat statement telling you what shares you have in your demat account.
How to get a demat account
To get a demat account, you will have to approach a Depository Participant.
A depository is a place where an investor's stocks are held in electronic form.
There are only two depositories in India -- the National Securities Depository Ltd and the Central Depository Services Ltd.
The depository has agents who are called Depository Participants. In India, there are over a hundred DPs.
Think of it like a bank. The head office, where all the technology rests and the details of all the accounts are held, is like the depository. The DPs are like the branches of banks that cater to individuals.
A broker, however, is not similar to a DP. A broker is a member of the stock exchange and he buys and sells shares for his clients and for himself. A DP, on the other hand, gives you an account where you can hold those shares.
To get a list of the registered DPs, visit the NSDL and CDSL Web sites.
3. Get a PAN
The taxman demands that you get yourself a Permanent Account Number.
This is a unique 10-digit alphanumeric number (AABPS1205E, for example) that identifies and tracks an individual in the taxman's database.
Almost every money transaction demands the use of a PAN. These include:
~ When you get a job
~ When you file an income tax return
~ When you open a bank account
~ When you deposit cash of Rs 50,000 or more in a bank
~ When you open a bank fixed deposit of Rs 50,000 or more
~ When you open a post office deposit of Rs 50,000 or more
~ When you buy/ sell shares and mutual funds
~ When you buy/ sell property
~ When you buy a vehicle
~ When you take a loan: home/ personal/ other
~ When you install a telephone (or buy a cell phone)
~ When you pay in cash to hotels and restaurants against bills for an amount exceeding Rs 25,000 at a time
~ You also need to mention it in every transaction you have with the tax officials.
If you are going through a tax consultant, you need not worry. He will supply you with Form 49A (the application form for the PAN number) and give you a list of the documents he needs.
However, if you believe in doing things on your own, the process is really not that tedious.
You could visit the official Web sites of the Income Tax department or UTI Investor Services Ltd or National Securities Depository Limited.
Download Form 49A from any of these sites and follow the instructions.
You should get your PAN in the form of a laminated card within a month.
4. Check if you need a UIN
This depends on how much you plan to invest.
The Unique Identification Number is the identification an investor needs to buy and sell shares or mutual fund units.
It is part of the Security and Exchange Board of India's attempt to create a database of all Market Participants and Investors, called MAPIN.
Who needs a UIN?
An investor who is involved in a single transaction of Rs 1,00,000 or more will have to quote his/ her UIN.
If you plan to be a prominent stock market player or a mutual fund investor and expect to deal with such huge amounts in the near future, you should get a UIN.
SEBI has appointed the National Securities Depositories Ltd that, in turn, has appointed Points Of Service agents. The NSDL Web site has a list of the POS agents.
Visit the office of a POS agent. Make sure you take an appointment before you go. As part of the application process, your fingerprints will be scanned and a photograph taken.
All you have to do is fill and submit an application form (there are separate forms for corporates and individuals). You can also download the form for an individual at the NSDL Web site.
Incidentally, the UIN is totally different from a PAN. The Permanent Account Number is an identification number for filing your income tax returns.
Now that you have all this in place, you're ready for the stock market. All the best!
Illustration: Dominic Xavier
