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

For buyers; consider a share continuously moving down over a period of time and you find the fall in the price as a buying opportunity. To decide your entry price, support level is there to help you. Since the stock is unlikely to go below this level, you can opt to buy at this level without fearing any risk of further downfall and aiming to take an opportunity to buy.

For sellers; consider a share continuously moving up and your aim is to have maximum profit margin and take a profitable exit. Thus to decide upon an exit price, Resistance level is what you should look for. Since the stock is more likely to “bounce” off this level rather than breaking through it, you can sell your stock for better returns.

In generic terms, for a stock trading between support and resistance levels, the strategy of a trader should to buy a stock at support and sell at resistance. For traders involved in short selling short at resistance and then cover the short at support.

As a part of technical analysis there is no denying the fact that support and resistance can help you benchmark your decisions but it is very important not to assume that these levels will not breach at all.

It is likely that a declining stock breaches a support level and continues dropping until it finds another support level. This is called breakdown and usually occurs when number of Buyers willing to step in to buy exceeds the supply available from sellers willing to sell. On the similar note, a rising stock may also breach the resistance level and continue rising till it finds another resistance level.  This occurs when the supply available from sellers willing to sell is greater then the demand from buyers willing to step in to buy. This is as simple as the concept of “demand and supply”. But next time you make a buy/sell decision, do take few minutes to have a look at these levels to enjoy its crunch.

All the best…

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

Stock quotes can be obtained in newspapers and online but the most convenient place is online as it is very close to real time information. Website like Yahoo!Finance and rediff help you get real-time quotes at a mouse-button click. Different sources provide different sets of information. Some might provide with detailed information like corporate actions, mutual fund activity in the shares in addition to some basic price information. Below is the list of common figures in the stock quote details:

52-week High/low : These are the highest and lowest price recorded in the last 52 weeks. The highest/lowest price figures for past 52 weeks can help make a judgement whether or not you should invest in stock at current price .

Days Range: It is the price range within which a stock has traded on a day. It thus consists of high/low price the stock has touched in a day.

PE: It is the Price to Earnings Ratio of the stock (per-share earnings by closing price).

Open and Close: Close is the last price quoted on a stock during a day. Open price is the opening price at which stock starts trading for a day. Opening price may not be same as the closing price of the stock on previous day.

Bid and ask prices: Bid price is the price a buyer is willing to pay for a stock while ask/offer is price at which seller is willing to accept the stock.

Trade volume: It is the quantity of shares traded on the stock exchange on a day. It helps you determine the liquidity of stock as you might land up in trouble if you want to sell your share and there is no one to buy it

Percentage change: It refers to the percentage change between current stock price w.r.t to its previous close.

Market Capitalisation: It gives you an insight into the company’s equity capital available for trading and is the price of each share multiplied by number of equity shares outstanding.

Dividend: Some quotes also give the last dividend paid to the shareholders and can be useful in determining how much and what type of dividend can be expected from the company. This also details their record date, ex date so that you can decide upon what time will be right to invest in the stock to avail the dividend.

Renuka Kinger

Day trading conditions the most intense approach to stock market trading. To be on top of the fluctuations in stock prices, day traders spend hours together in monitoring the market. Day traders could make dozens of trades any day, sometimes in a matter of minutes hoping to grab the wave of price change. They avoid the risks of long term buy and hold. Day trading could be exciting, the fast pace attracting risk takers. Yet this strategy for stock market trading is only effective for day traders, who apply analysis rather then emotion to trading decision. Savvy day traders could turn profits quick. Emotional traders usually lose fast and leave disenchanted.

Swing trading uses a slightly longer time horizon than day trading, watching a stock for weeks or months before trading. This type of stock market trading relies on careful monitoring of fundamental and technical analysis. Swing traders often specialize in a certain business or industry so that they become experts in the movement within those stocks. They also have more time to study the company financial reports and industry forecasts. Since swing trading does not require hours of daily monitoring, it is a good strategy for the trader who wants to make money from stock market trading without turning it into a full time job. Even the study of reports could be done during the daily commute or lunch hour so that the swing trader stays well informed.

Position trading works well for investors who want to be involved in the stock market trading, but run short of time. Stocks are being held for months awaiting any changes in the trend. Position traders keep up with the fundamental and technical analysis as well as news events but apply a long term strategy to their stock market trading.

To understand this in a better way, let’s have a look at the below comparison chart between futures and option:

From the above description, it can be inferred that be it future or an option; these are the ways of hedging the risk of investments. It provides a protection against unexpected rise or fall in the price by entering into an agreement to be executed in future date. The concept is very old when agreement used to be made by negotiating the price for harvest of season having been unaware whether harvest will be meager or plentiful. When harvest time came, demand would rise sharply and ultimately giving the holder of agreement a chance to earn more than what he had expected.

Whatever be the case, playing options and futures has always been a risky. So better  be careful before you enter into the arena!!

Renuka Kinger

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Holder: Holder is the buyer of derivative agreement. By buying an agreement, the buyer may agree to buy or sell the underlying asset.

Seller: One who sells the contract to holder.

Expiry date: The date at which agreement will get matured / exercised.

Strike price: The price at which derivative will get exercised and is decided at the time of entering into agreement (between buyer and seller).

Premium: It is the price which buyer pays for buying an option contract. The premium is not to be paid for futures contract.

The reason of its appeal to investors which makes it different than other financial instruments is that it is not an asset in itself but an agreement to convey the transfer of actual assets later in future. The catch here is why to enter an agreement to buy/sell assets in future?? Why not buy the real asset (underlying asset referred here) directly from spot market at current levels??  Why making an agreement to be executed in future date? The answer is; derivates are usually seen as instruments for bringing in protection against unexpected rise or fall in the price of underlying asset. Secondly, derivatives are used to yield better returns with lower capital investment as compared to the amount that will be invested to buy the shares directly form the spot market.

Types of derivative instruments:

Forward Contract: It is an agreement to buy or sell the derivative at a known date in the future at a price decided as per negotiation between the contracting parties. These are not traded in exchanges.

Futures Contract: It is an agreement to buy or sell a financial instrument at a known date in the future at a price as per negotiation between contracting parties. These are traded on stock exchange.

Option Contract: It is a contract that gives holder the right, but not the obligation to exercise it. Call options give holder the right to buy while put option give the holder the right to sell at the strike price at stipulated date as per agreement.

Warrants: These are long term options having 3-7 years of expiration. Warrants are issued by companies for raising finance with no initial servicing costs like divided or interest. It is a type of security issued by corporation usually together with a bond or preferred stock that gives holder the right to buy a certain amount of common stock at a stated price. So it acts as a “sweetener offered along with the fixed-income securities”.

Swap Contract: Swaps are agreements between counterparties to exchange one set of financial obligations for another as per the terms of agreement.

Swaptions: Swaptions are options on swaps. They give holder the right to enter into having calls options and put options.

- Renuka Kinger

Market order: When you put buy or sell price at market rate then the price gets executed at the current rate in the market. The market order gets immediately executed at the current available price.

In market order there is no need to mention the price; the shares will get executed at the best current available price.

If you wish to buy or sell shares at any specific price, i.e. market order is not suitable for you then you have to go for limit order.

Market order is for those who want to buy or sell immediately at the current available price.

Limit order – It’s totally different from market order. In this, the buying or selling price has to be mentioned and when the share price comes to that price your order will get executed at the price mentioned by you.

But here it’s not sure that the price will come to your limit order.

In day trading it’s risky because you have to close all your transactions before 3.30 pm and if in case the price doesn’t reach to your limit order, your order will be open and then you have to go through (bare) heavy penalties. Importantly, limit order and stop loss trigger price are used together.

Stop loss trigger price: Stop loss and trigger price are used to reduce the losses. This is a very important term especially if you are day trading (intraday). Stop loss, as the name indicates, is used to reduce the loss.

You can use a pivot calculator for simple stop loss calculation for delivery based trading and intraday stop loss depends on how much you are ready to lose – the maximum amount you are ready to lose- it also depends on the price movements of the scrip for that particular day

Source : Various

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.

Short Selling

Looking at the flow of shares in above flowchart, one would ponder why to borrow shares for selling in market and then transfer them back to the lender? The logic behind shorting is very simple; earning profit margin. Let’s see how??

If you think a stock is overvalued and expect that the price would come down in future for sure; you would wish to sell the shares at current levels at higher price. So you borrow the shares and sell them at higher price. And when the stock actually falls as you had speculated; you buy it from market at lower price and return it to the lender and the difference between the selling price (higher) and buy price (lower) is what you earned in the deal. So at the end you must close the short by paying back the shares and this is called as “covering the short”. Concluding this, investors who anticipate fall in the stock price go short to take advantage of market fall. An investor can hold the short for as long as he wants but he is charged an interest as it is similar to a loan taken in the form of shares. Also if during the course of loan, the company declares dividend or rights issue, it must be paid to the lender who is the actual owner of shares because you are just a borrower.

Short selling is considered to destabilize markets directly or indirectly. In 2001, the stock prices crashed heavily owing to short selling by big operators after which SEBI banned it. After a gap of 6 years in December 2007 SEBI came up with updated norms of short selling to cover the loopholes and ultimately institutional investor were also permitted to short sell.

Concluding this, short selling no doubt gives you an opportunity to earn profit by taking advantage of downturn of markets, it might bring in huge loss to your investment if stock price moves up. Because in real sense, shorting is a bet against the current market trend. When stock is at current higher levels, you are expecting it to fall down and entering the arena. Speculation is what makes shorting a riskier job. So beware of the dark side of shorting before you actually go for it!

All the Best

Renuka Kinger