WHAT IS A DIVIDEND? HOW IT WORKS? UNDERSTAND HOW TAXES WORK ON THE STOCKS AND CRYPTOS?

 In today’s article, I am going to talk about a few things if you know these things then it will help you to become a better investor. In this article, I will specifically be talking about dividends, taxes, and a few key strategies that you should know about in order to be an intelligent investor. So, without wasting a time, let’s start,

So, the first thing I will talk about is dividend. Then the first obvious question comes what is a dividend?

So, the dividend is the amount of money that you receive from a company once or twice a year if you are a shareholder of that particular company.

                   

                                                                       

For example, you are a shareholder of HDFC bank, so if in a financial year, that particular company makes a lot of money then the company decides that they will give a small amount of money back to the shareholders as dividend. Each company has its own dividend percentage, I have mentioned the name of HDFC bank because it is the biggest bank in India, and one of the top companies in India. I hope you have understood the meaning of dividends.

So, whenever you will buy a stock then look at the dividend percentage once, if the dividend is higher in a large-cap company, then it is considered that the company is good. It has a lot of money with them, the company has already explored its businesses a lot in different sectors, and because it is making so much money so the company wants to give back a small amount of money to the shareholders to keep them happy and a long-term investor in that company. But when a small company tends to give money back to the shareholders then it is not a very good thing because the company is in the small-cap group, it has a lot of work to be done, and it has to expand a lot, instead of giving money back to the shareholders the company should reinvest that money into its own business because we as an investor expect a greater return in the long run instead of getting short term dividend. The same thing works differently in two different scenarios.

If a large-cap has a good dividend rate, then it is taken as a good sign because few great investors think that ultimately in the future, we will have to rely on our dividend incomes for our expenses rather than selling the stock and enjoying the capital gains. They say in the future, everything (for example medical expenses, education, and marriages) will be very expensive, we don’t know how long we will survive, so, at the age of 50-60, selling out your stocks wouldn’t be the best possible option. So, if you would have a few good stocks in your portfolio that you keep investing in for a decade or 2 then the amount of money you will be getting as dividends will be enough to pay out your expenses.

 

Let’s talk about the taxes that will be levied on your capital gains, it could be your stocks, mutual funds, debt funds, cryptos, or any other investments.

First, let’s talk about taxes on stocks & mutual funds.

There is one type of fixed tax that you have to give if you are an investor, it is called LTCG tax or long-term capital gain tax. You might want to know what is capital gain so, here capital gain is the amount of money you have made from your stocks as profit. For example, you bought a few shares worth 1 lac rupees and remained invested for 5 years and now your stock value is worth 2 lac means you have made 1 lac of profit & that one lac is considered as your capital gains. This rule particularly started applying on the stock market since 2018, although a lot of controversies happened with that issue so, the government made a change on their decision that we will only have to give taxes if our capital gain is more than 1 lac rupees. So, the amount of tax that is going to levy on our capital gains is 15% if we sell the stock or mutual funds in less than a year and 10% if we sell the stocks after a year at least. When you sell your stocks or mutual funds in less than a year then it is considered short term and if you sell after a year then it is considered as long term in the dictionary of the stock market.

There is a way if you want to save more taxes on your capital gains, you can look at this as one of the strategies so, let’s understand this,

For example, you have invested 100000 rupees in TATA steel. After 4 years it has become 180000, if we consider that after a year it will cross 2 lac of your net amount, then you have to pay 10% tax on whatever the profit you will make (if your capital gain is more than 1 lac), here you can do one thing, whenever you think your capital gain is about to cross 1 lac then before reaching your capital gains on to the 1 lac limit, if you immediately sell that particular stock then according to the rules, you don’t need to pay capital gain tax because you only have to give capital gain tax if your gain is more than 1 lac & after just selling your stocks or mutual fund you should immediately buy that stock or mutual because you know it will grow in the long run. And if you do that with your mutual funds then keep one thing in mind your exit load should be zero and it isn’t so hard to find such mutual funds. 

If you invest your money via mutual funds then one more important thing that will be levied on you is called the expense ratio. It is around 0.5-1.5%, expense ratio simply means mutual funds managers are charging a certain fee from your investment amount every day based on your investment value. Let’s understand this clearly, for example, if you have invested 100 rupees in the stock market via a mutual fund, let’s assume the expense ratio is 1%. So, now if your investment value is 100 rupees & your expense ratio is 1% so, first they will divide this 1% with 365 days & whatever the amount they will receive, they will take it as their fees, at the same way after 6 months if your investment value is 200 rupees, then they will take their expense ratio based on that day’s amount value. It means the expense ratio also compounds with the time that’s why we should try to get into a mutual fund that has a lower expense ratio.

    

There are also a few taxes like stump ratio, TDS, etc.

 If I would talk about cryptos so, RBI has already said that whenever we try to sell crypto then we have to pay up to 30% tax on our capital gains from first April 2022 to 31 March 2023. Before we didn't have to pay that much taxes, but because the government has started taking a 30% tax on crypto then definitely they will take care of this regulatory system. they will try to manage it in a systematic way.

If you are planning to get into this crypto space, NFTs,  then be aware of these coins or tokens. 99% of cryptocurrencies are bad cryptos. By the way, all the cryptos are not currencies they have different purposes to serve, first learn about the cryptos you are planning to invest in because it is a very volatile space, you should focus upon behind the scenes instead of few lucrative returns, in fact, my own crypto portfolio is in 60% loss, but I am very bullish about that blockchain I have invested in so, I am not worrying anyway, whatever the investment I make, those investments are purely for the long term purpose. One more thing I would say is my crypto portfolio is not so diversified, the majority of my money is in one crypto and it also teaches me that I should have diversified my crypto portfolio irrespective of how lucrative the returns are! 

When it comes to becoming an intelligent investor, as an intelligent investor along with taking care of our investments we should also take care of our expenses. Often it happens that whenever markets are in green, the market is performing well so, it has been seen that a lot of investors end up buying a lot of unnecessary stuff that they actually don't need, no we shouldn't do such things. 

At the last, I would say everything has its own right place, what I actually want to say here is that we all are going to make crazy amounts of money if we do the right thing at the right time, but in the end, we shouldn't forget why we started. it wouldn't make any sense that we become a millionaire at the age of 60 by saving all the money we have been making in the process and spending our life at the very minimum expenses, if we do that then it wouldn't be the right perspective to look at it. we have to understand whatever we are doing, doing because we want happiness at the end of the day. we do such things in order to make our life easier. Oh, I think I have become a philosopher now, I don't know why but sometimes the inner philosopher of myself has come out randomly, okay jokes apart. but ultimately, you guys are smart enough to understand what I mean. 

Thanks for reading the article completely. I hope you have got some insights, let me know in the comment section did you enjoy this or not, what should have I added more in that article, any feedback, or anything you want to say to me, you can comment below. I would love to read your comments. Will meet soon.