‘Margin” means borrowing money from your broker to buy a stock. Now the question is why would you borrow? Investors generally go for trading on margin so to increase their purchasing power so that they can own more stock without fully paying for it. That means you will pay a part of the buy price and the broker will lend you the difference.

For the loan you have taken -

• You will pay interest in addition to the usual fees.
• Broker will hold the stocks as collateral and has the right to sell that as well in case buyer doesn’t meet certain obligations as per margin rules and agreements.

Let us understand this with an example:

Suppose you wish to buy a stock with market price of Rs 50.  Under margin trading, you would be paying Rs 25 in cash while remaining 25 Rs will be lent to you by the broker (Assuming the initial margin requirement with your broker is 50%). How does this help? Let’s see.  Suppose the price of the stock rises to Rs 75.

In case of Margin trading – Your return on the investment is 100% because you paid Rs 25.

In case of normal trading – Your return on investment is 50% because you paid Rs 50.

However there is also an equal probability of higher loss for trading on margin. Suppose the stock price falls to Rs 25. If you fully paid for the stock, you lost 50 percent of your money. But if you have traded on margin, you lost 100 percent. And on the top of that you are supposed to pay interest for the loan you have taken from the broker along with the broker’s commission. Moreover if the investor doesn’t maintain minimum margin in his account the broker will have the right to sell all your stocks without notifying you. By this you would even loose the chance to make up your losses when the price goes up later. Below are certain terms that would make the concept more clear.

Initial margin: The proportion of total purchase price an investor is supposed to deposit for opening a margin account is referred as its initial margin and is generally 50% of the total value.

Maintenance margin: In order to keep the margin account open for doing margin trading, it is necessary to maintain minimum cash or marginable securities which is called the maintenance margin. This is just to prevent an investor from incurring a level of debt that he would not be able to repay.

Margin call: If your account falls below the maintenance margin, your broker will make a margin call to ask you to deposit more cash or securities into your account. If case you fail to meet the margin call, your broker will sell your securities so to make up for the stipulated maintenance requirement.

Lastly, for novice traders it is very important to have a realization that trading on margin can help you magnify your profit and at the same time multiplies the associated risks.

Happy DIWALI and Happy Investing

Renuka Kinger

If you are already familiar with stock market, there is a small homework for you. Check out the contract note you have received from your stock broker. Or else, if you plan to enter into stock markets and seeking for a broker, exercise your mind a little to know the net brokerage being charged by your broker and study the various commission components. The reason is simple; the amount you pay to your broker may make difference your winning or loosing in the trade. Confused??…It is a common mistake that novice traders execute trade assuming they are earning atleast meagre profit margin, but if all the components including brokerage, taxes, and stamp duty are accounted for, the profit margin comes out to be negative. Isn’t it strange? Yes, so we are here to understand the computation of the net trading amount you pay to your broker.

RATES OF BROKERAGE

There are many brokers charging different rates of brokerage. For example, ICICI Direct charging @.75% and HDFC charging @ .5% of trading amount. However the net trading cost is computed as below:

Trading cost = Brokerage + STT + Stamp duty + other charges

So in addition to brokerage, there are below costs accounted in net amount:

1. STT – Sale transaction tax is imposed on the sale/purchase of securities by retail/institutional investors and is charged on total turnover (cost of each share * no. of shares). For delivery of shares it is charged at .125%. For intraday selling of shares, it is charged @.025%. For buying, there is no tax for intra day trades. Currently government is under consideration to remove/reduce STT because since it was introduced in 2004, the cost of transaction of trades has drastically increased. This leads to loss in business as Indian markets are becoming less competitive compared to other emerging markets.
2. Stamp duty: Stamp duty is also charged on total turnover. For delivery of shares it is charged at .01% and for intra day it is charged at .002%.
3. Other charges: it includes below component:
a. Transaction charges: For trading of shares at NSE, it is charged @ 0.0035% while for BSE, it is charged @ 0.0034%.
b. SEBI turnover charges: For equity transaction, this remains NIL but for derivative transactions, it is charged @ 0.0002% of total turnover.

c. Service Tax: Service tax is charged on all the components

So net brokerage will be calculated as below:
Net brokerage = Brokerage + STT + Stamp duty + Other charges

So next time you trade, try to find out how much earning have you shared with your broker. Happy trading!!

Renuka Kinger

Trading online has become very popular in today’s time when you just need a trading account and after that you can trade comfortably while sitting at your home. Apart from comfort of trade it provides various facilities like:

• Ease of buying and selling of shares.
• Online receipt of contract notes/ trade statement for the transactions.
• Direct deposits of dividends/ bonus amount etc to account.
• Various trading tools for ease of making investment decision.

One click of mouse button is of ample importance while trading online because sometimes it is what that draws a line between your winning or loosing the game. Trading online is very interesting but you have to be a bit careful as well. The process of trading is very easy but making money is a bit tricky. All you need is a trading account and a little bit of caution to operate the same. Below are some do’s and don’ts while trading online:

Prices change at the blink of eye and the transactions are not always in real time. Moreover the speed of your internet might cause delay. So always make sure not to change your decision until the last moment. Take time examining the stock and make decision ahead of time so that you don’t loose while in panic.

An important feature of stock markets is volatility. So if you don’t keep a close eye on how your stocks move while placing an order, you might land up in losses.

Online trading is a matter of trust between you and your broker because there is no in-person contact. But you can’t leave everything on trust. Make sure your broker provides you detailed email statements and contract notes of executed trades.

Online trading provides facility to place limit orders. If you don’t have sufficient time to keep track of the stock prices, fix up a buy/sell price based on your judgement and go for limit orders. Moreover limit orders help you take ample advantage of volatile session during the day.

In addition to the brokerage rate being paid, prudent investor should always be well aware of the various Fees and commissions charged by the broker for various services offered like Mobile services, buy sell alerts, reporting, chart and other tools to facilitate easy trade as they really affect your net earnings.

For novice traders, it’s a suggestion to always trade with stop losses. Set your stop loss to level to avoid the risks associated.

Even though chances of default by a good brokerage firm are nil but a smart investor should always keep track of credit/debit of money in their bank accounts or transfer of shares to/from the demat account accordingly for each trade executed because technical reasons might lead to discrepancy which cannot be avoided.

Prevention is always better than cure. Security is another important factor for online traders. It is advisable always to follow security measures related to passwords and other personal information while login into the websites to eliminate chances of theft of identity and information.

RENUKA KINGER

It is very interesting to invest in shares, though most of the people would like to start with small money.

First of all, you need to know a little bit in detail about the stock market, then about the shares and the mode of their trading. What are the risks involved and how to be smart in dealing with shares?

• Stock Market – It is the place where the shares of listed companies are bought and sold. In India, you have BSE and NSE as two big stock exchanges.

• Shares are bought and sold by you and me only through approved brokers.

• Approved brokers are mostly banks like the ICICI, HDFC, IDBI, UTI Bank, SHCI, are to name a few.

• First you need to open an account with a bank, that has the Demat account facility.

• Go to the respective bank  and open a Savings account with deposit of around Rs. 10,000.

• Tell the bank that you want to deal in shares and ask them to open a Demat account. It will be done automatically after signing a few forms.

• A Demat account is nothing, but the account where the shares bought by you will be kept separately.

• Only you could operate that account online, through Internet.

• You could open the online facility offered by the ICICI, HDFC or ShareKhan or others  and buy shares you wish and decide the quantity and the price.

• Here the bank will act as a broker. You online order for purchase would be carried out by the bank. They charge broker commission, much less compared to private brokers.

• It is very important for you to have enough balance to your credit in your savings account.

• As and when you buy on line, your Demat account will be credited with those shares. The money for the purchase will be automatically deducted from your account by the bank.

• You also have to keep looking for opportunities to sell the shares that you have already bought and kept in your Demat account.

• For buying and selling, it is necessary to familiarize which shares to be bought at what prices and sell them at what price.

• As and when you decide to sell (depending on the price quoted in the market) you could sell them through online trading system.

• The moment you sell your Demat account will be debited with the number of shares sold by you.

• Your account will be credited with the amount for which you have sold.

• Depending on the amount of profit earned, tax will also be deducted by the bank (TDS). The bank will give you a TDS certificate by the year end, i.e., March 31, of that year which you could attach with the return to justify the tax payment.

• When the shares could be bought or sold?
  Always sell the shares when the price is up and buy when the price is down. Every body had to adapt to this formula.

• What profit should it give you?
  You buy a share for a particular price. Take the amount as investment. Any bank will lend you at ten per cent interest. It will give you 24 per cent return if the share price rises in such a way. Do not wait for the market to crash and start searching for buyers for the price you quote.

  After selling, never look back and repent for what profit you have earned, had you delayed the sale. Be happy that it did not happen otherwise. This is the best way, to sell.

• If you want to buy, look for 52 week low, look for the peer companies, their price and compare it with the company you want to buy.

  Look for the prospectus, future plans and the profit the company ought to make in the next year. Take the perception or a change and buy.

• You cannot take profit in the buys. Losses do occur as long as you are at decent surplus for which you have no reason to be unhappy.

Happy Investing

While concerns about online security will always be there, rest assured that the brokerages themselves have a very, very high stake in making you feel comfortable about the level of security being used. All online brokerages have a portion of their website devoted to explaining the measures they employ to protect your transactions.

Here are a few questions that you may have regarding Online Trading in Stocks.

Is trading through the Internet safe?

The safety of transactions on the Internet depends on the encryption system used. The better this transaction system, the more difficult it is for any person to hack the site. Internationally, the best system available today is the 128-bit encryption.

Secondly, you too can ensure the safety of the transactions online. You normally get a secured user id and password, the secrecy of which is to be maintained entirely by you.

Thirdly, if the transaction system requires no manual intervention, you further improve the safety in the transactions. Among Indian sites, very few are fully integrated online trading sites. This enables the elimination of the possibility of any manual intervention, which means orders are directly sent to the exchange ensuring that you get the best and right price.

Is trading through Internet Difficult ?

The experience of trading through Internet depends a great deal on the type of product offered by the site. Say, for example, one of the issues bothering you may be getting tired of the paperwork involved after every trade, in writing cheques.

In online trading sites, the greater the back-end integration of the system, the greater the amount of work the sites do for you, therefore greater the convenience available to you.

In big financial institutions your broking account, bank account and Demat account are linked electronically. So when you punch in a buy or sell order, the system checks the funds/shares availability and automatically credits/debits the accounts once the order is executed by the exchange.

Is trading through Internet a costly affair?

The convenience provided by online trading is even then worth the costs involved.

And online trading sites are not that costly. For example, a trader can trade shares on margin at rates as low as 0.10% and if one wishes to trade in cash, then the rates applicable are as low as 0.4%.

However, it is important to compare various online trading sites on brokerage rates, inclusive of all sub-charges.

I am pretty satisfied with my present broker who serves me off-line. Why should I choose to go online to trade shares?

Many of those customers who have chosen to trade shares online today, had at one point of time been trading through offline brokers, just like you are today. They took a chance to go online and trade shares. After realizing the advantages of trading shares online, they have shifted to online trading now. Just try trading shares after opening an account with any online trading site. However, before choosing an online trading site, please compare all such websites and then make a decision.

How frequently are the prices updated at all these online trading sites?

The tickers available at online trading sites provide instantaneous updates. Also, some websites can offer to transact in those shares instantaneously and with convenience.

How can I be sure that I shall be trading at a price I want to or at a price appearing in the website?

The solution to your problem could be provided in different ways by different online share trading sites. For any trade order, the customer is asked to click ‘Proceed’ after he has the opportunity to completely check the order verification form.

Moreover, you have the option of modifying or canceling the order till the moment the order is executed at the exchange.

Finally, online trade confirmations reach our customers within 4 minutes, while contract notes are dispatched at the end of the day and reach within 24-36 hours.

What other services can I get by trading shares online?

Internet has brought to the retail investors what was till sometime ago the sole prerogative of large brokerage houses and high net worth individuals.

In the era of capitalism, with arguments of whether socialism would take over, emerged the concept of stocks and hence stock markets. We were always familiar with the bonds that the government issued against a certain security it provided us, which we often term as deficit financing. It is now applicable for the private industrialists as well, when they want to accrue capital and they are running short of funds. They fly shares, some of which are collectively called stocks and they collect money against the shares that you hold. This way you actually own up the company even though just by bits and pieces. Your money, of course is a risk of undergoing a loss if the company loses profit. However, the chances of gaining profits are not very less either. Often shares are termed as risky assets, which can yield very high returns. You could say it acts almost like an insurance market when it comes to risk spreading.

As many seem obvious to you, unless you know your way through the stock market, you might end up losing money. Stock market, as the common notion goes, is not gambling for money. It is rather pure mathematics and what we call in statistical terms, econometrics. So, when you are new to stock market investing, trying to find your way out, you indeed could do with the help of a stockbroker, who know the principles of how the market will work for a set of political and financial developments. And once you know your way about the market, you could do with discount brokerages, which charge you a lot lesser than the traditional stockbrokers in lieu of providing you with lesser advices. Discount brokerage allows you to take your own decision with little or no help from the stockbrokers as per your preferences.

If you want to trade stocks or buy and sell financial assets within the same day, what you do is day trading. With Internet making the world a smaller place, the concept of online stock market trading has come up to be very popular. You can undertake online stock trading when you want to trade stocks without being fooled into buying a certain stock or selling one, doing directly to the market. This is where discount stock trading could help you from losing money for nothing. It provides you with an opportunity for the cheapest stock trading. Many casual traders are now into the scenario of day trading due to improved Internet options, changes in legislation and advanced technology. Traditionally though, day trading was the nook for financial firms, investors and speculators.

Discount stockbrokers allow you the flexibility of creating your own portfolio, sharing your money between mutual funds, bonds, stocks, options and exchange traded funds. Most of the companies that are into discount brokering, allow the options of banking like checking and savings accounts, credit cards, certificate of deposits and mortgages and money market accounts. Such companies offer you options of the best online trading.

To trade in shares, you have to approach a broker However, since most stock exchange brokers deal in very high volumes, they generally do not entertain small investors. These brokers have a network of sub-brokers who provide them with orders.

The general investors should identify a sub-broker for regular trading in shares and place his order for purchase and sale through the sub-broker. The sub-broker will transmit the order to his broker who will then execute it .

SEBI has  laid down certain Guidelines for Dealing with Brokers & Sub-brokers

Here are the DOs

Deal only with SEBI-registered brokers/sub-brokers.

Ensure that the broker/sub-broker has a valid SEBI registration certificate.

Ensure that the broker/sub-broker is permitted to transact in the market.

State clearly to the broker/sub-broker who will be placing orders on your behalf

Insist on client registration form to be signed by the broker/sub-broker before commencing operations.

Enter into an agreement with your broker/sub-broker setting out the terms and conditions clearly.

Insist on contract note/ confirmation memo for trades done each day

Insist on bill for every settlement.

Ensure that broker’s name, trade time and number, transaction price and brokerage are shown distinctly on the contract note.

Insist on periodical statement of accounts.

Issue cheques/drafts in trade name of the broker only.

Ensure receipt of payment/ deliveries within 48 hours of payout

In case of disputes, file written complaint to the broker/sub-broker, to the stock exchange of which he is a member and to SEBI within a reasonable time.

In case of sub-broker disputes, inform the main broker about the dispute within a maximum of 6 months.

Familiarise yourself with the rules, regulations and circulars issued by the stock exchanges/SEBI before carrying out any transactions.

Watch out for the DON’Ts

Don’t deal with unregistered broker/sub-broker

Don’t pay more than the approved brokerage to the intermediary.

Don’t undertake deals on behalf of others.

Don’t neglect to set out in writing orders for higher value given earlier over the phone.

Don’t sign blank delivery instruction slip(s) while meeting security pay-in obligation

Don’t accept unsigned/duplicate contract note/confirmation memo

Don’t accept contract note/confirmation memo signed by any unauthorised person.

Don’t delay payment/deliveries of securities to the broker/ sub-broker.

Don’t get carried away by luring advertisements

Don’t be led by market rumours or get into shady transactions

All the best in your Stock market Trading endevour