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Equity Basics | Functioning of stock market | Starting to trade

Starting to trade

 

Starting to trade - all you need to know about shares purchase and sale transactions

Once you are geared up with all the investing basics and understanding of equities and stock markets, the next thing on your mind will be how to start trading in equities?

Well don’t worry; this section will guide you through all the information you need to start.

Choosing your broker

Whenever you buy or sell shares, you have to open an account with a stockbroker who is registered with the relevant stock exchange to carry on the share trading. You need to choose the right broker, who can help you not only your order placements and settlements but can also provide you right advice and guidance.

You need to ensure that the broker/sub-broker you are getting your account opened with must be registered with SEBI and the concerned stock exchange. You can verify this from the registration certificate displayed at his office. The list of such authorised brokers/sub-brokers is available on the respective exchanges’ website.

You should also ensure that your broker has the infrastructure to place your orders with speed and accuracy. (You can walk-in in any of Arihant’s offices or investment-centers and see all of it!!).

Opening an account and starting to trade

Once you decide to invest with Arihant, you’ll need to open an account with us and get yourself registered. You will have several account options to choose from and depending on your investing need and skill you can choose the account right for you. Click here for documentary requirements for opening an account.

You also need to open a demat account when you invest in equities. It is advisable to have your trading and demat account with the same broker for smooth settlement of your trades.

What are the costs associated with share trading in the cash market?

Mainly the following costs are involved when investing in shares through direct investment route:

  • Brokerage – The stockbroker offers a service to the client and hence charges a commission on every transaction entered through the broker. The rate of charge of transaction differs with delivery-based or intra-day transaction. This commission varies from broker to broker and client-to-client.
  • Depository charges – Shares that are purchased or sold are transferred in electronic format by your depository participant (DP). So every time you buy or sell shares the transactions are being noted by your DP. The DP normally charges an annual maintenance fees and/or a fixed charge on each transaction.
  • Service Tax (ST) and Education Cess (EC) - Service Tax (ST) and Education Cess (EC) are payable as a percentage of brokerage due to the broker. ST and EC together are presently levied at the rate of 12.24%. This is payable to the government by the broker.
  • Capital Gains Tax Capital Gains Tax – Long-term capital gain is not taxed in the case of shares. As per Income Tax act, long-term capital gain arises when you sell the shares after 12 months from the date of purchase and make profit from the sale. However, short-term capital gain is taxed at 10% (+ 10% surcharge if applicable, + 2% education cess for all) and arises if you sell the shares within 12 months from the date of purchase and make a profit.

  • Securities Transaction Tax - STT or turnover tax is levied by government on every transaction done on stock exchange (NSE or BSE). The STT is applicable at different rates on the value of the “taxable securities transaction”. This tax amount is included in the amount you pay to your stockbroker for any purchases or sales you make. The stock broker collects this amount and pays to the stock exchange on your behalf. As per the Finance Act 2006, STT is charged as per following:
STT rate applicable while buying shares for delivery 0.125%
STT rate applicable while selling shares for delivery 0.125%
STT rate applicable while trading in shares 0.025%
How much money do I need to start?

How much money do I need to start?"I don't have enough money to invest in the stock market."

It's a common complaint, but also a major fallacy. Although some would have you believe it to be true, you don't have to be rich to invest in the stock market. It's possible to start up with a very small stake, as low as Rs 50, and build it over time - giving you far greater rewards than you would realize from simply putting that same amount of money in the bank*.

You can start trading with whatever amount you want. In delivery-based trading, you need to keep as much amount in your bank a/c as you wish to trade. However in margin trading, it can be as low as Rs. 5000. Your exposure will however depend on the margin you have paid. The higher the margin, the more exposure you will have.

Now the next question you need to decide on is which way do you wish to go about for investing?

There are two ways investing in shares

 

Share margin trading* Share margin trading: Imagine this: you're sitting at the blackjack table and the dealer throws you an ace. You'd love to increase your bet, but you're a little short on cash. Luckily, your friend offers to lend you Rs. 6,000 and says you can pay him back later. Tempting, isn't it? If the cards are dealt right, you can win big and pay your friend back his Rs. 6000 with extra profits in your pocket. But what if you lose? Not only will you be down your original bet, but you'll still owe your friend Rs. 6,000. Borrowing money at the casino is like gambling-on-steroids: the stakes are high and your potential for profit is dramatically increased. Simultaneously, your risk swells up too.

Share Margin Trading provides a credit line to invest in shares using cash and/or marginable shares as collateral. Margin is basically borrowing money from your broker to buy a stock and using your investment as collateral. It provides you with the benefit to increase your share purchasing power as it leverages on your existing portfolio of shares.

Margin is a high-risk strategy that can yield a huge profit if executed correctly. The dark side of margin is that you can lose your shirt and any other assets you're wearing. One of the only things riskier than investing on margin is investing on margin without understanding what you're doing.

SEBI has allowed member brokers to allow margin trading facility to their clients in the cash market since 2004. With this clearance, India's systems have come on par with the international markets -- like those of the United States, the United Kingdom, Canada, Singapore and Hong Kong. The margin arrangements are agreed between the broker and the client subject to SEBI guidelines.

But remember, share margin is not an alternative for the dues you have to pay for your purchase. It will only provide you an increased exposure in the market during the day.

Should investors opt for margin trading?

Margin trading clearly helps you in leveraging your trade manifold. Anyone can make handsome returns if the scrip moves in his/her favour. On the flip side, a fall in prices would mean that investors would have to bring in funds to retain the required maintenance margin or liquidate the stock.

Borrowing money isn't without its costs. Regrettably, marginable securities in the account are collateral. You'll also have to pay the interest on your loan. The interest charges are applied to your account unless you decide to make payments. Over time, your debt level increases as interest charges accrue against you. As debt increases, the interest charges increase, and so on. Hence, one could actually stand to lose more money than originally invested.

Therefore, buying on margin is mainly used for short-term investments. The longer you hold an investment, the greater the return that is needed to break even. If you hold an investment on margin for a long period of time, the odds that you will make a profit are stacked against you. Thus, it is very strongly felt by the broking community that margin trading would benefit the high net worth individuals more than retail investors.

Margin accounts can be very risky and they are not suitable for everyone. Before opening a margin account, you should fully understand that:

  • You can lose more money than you have invested;
  • You may have to deposit additional cash or securities in your account on short notice to cover market losses;
  • You may be forced to sell some or all of your securities when falling stock prices reduce the value of your securities; and

It is recommended that the retail investor must keep away from jumping into margin trading immediately due to the following factors:

  • Indulge in margin trading only if you have 'risk capital'. Risk capital is surplus money set aside, which the investor can afford to lose.
  • Buying on margin should be used for short-term investments. The longer you hold an investment, the greater a return you need, to break even. If you hold an investment on margin for a long period of time, the odds that you will make a profit are stacked against you.
How to find information on companies for making investment?

Where do you find the information about various companies in this diversified world of finance? Chillax, once you have the grit to do something you’ll find numerous ways to walk on to your path. Any financial educator can tell you about the importance of being a well-informed investor. Investment in equity needs proper study and research before putting your money on the line. You can use the following SOURCES OF INFORMATION to undertake your research:

  • Company’s website: In present times, most companies maintain a website. Most of the websites offer information to investors, which include annual reports, financial statements, stock information, company news, updated order books , etc.
  • Corporate filing on the ExchangeCorporate filing on the Exchange: Companies listed on the stock exchanges (whose shares you can purchase/sell) have to compulsorily submit all information on the respective Exchanges. Annual results, announcements of dividend or bonus shares, buy-back, demerger and other corporate events are updated continuously with the exchanges at appropriate timings.

  • Research Reports: The array of research sources available to investors can be bewildering. Apart from the financial press or independent research agencies, your broker (Arihant) may make detailed research reports available depending on the level of service you require.
  • Media: Business newspapers and magazines like Economic Times, Business Standard, Mint, Business Today, etc. are all teemed with information on various company’s events. Besides, there are various business news channels like CNBC TV-18, NDTV PROFIT, Zee Business that update the viewers with all kind of happenings in the stock market 24/7.
  • Internet: One of the most fertile sources of stock information is the Internet. There is also a strong online investment community sharing information in online chat rooms and message boards. But be careful about where you get you information from. Stock chat rooms and message boards can be abused by unscrupulous promoters writing under fake names. These people have been known to pump the stock prices of well-known companies by describing details of fictitious sales agreements, unrealistic revenue projections or non-existent partnerships. Websites of regulatory bodies like NSE, BSE, AMFI, Sebi, etc., statutory organizations, credit rating agencies provide reliable sources of information.
Ways of Trading through a broker
  • With a broker's assistance – You can buy/sell shares through visiting a stock broker’s office and placing the order with a certified dealer. Place stock trades with the assistance of a professional, certified Arihant operator, at any of the Arihant investment centers.
  • Placing order through telephone – Brokers generally offer a telephone-trade service, wherein you can call at a given number and place your order by giving-in your user id and verification of your identity. With our Tele-trade service, you can place your trading orders just through making a phone call. Contact your nearest Arihant office to avail this facility.
  • Internet – You can buy/sell shares online through an online trading platform. You can trade online with access to Arihant’s internet trading site on i-Trade (Arihant’s online trading software). With Arihant, trading is just a click away - anytime-anywhere at your convenience.
Execution of Trade

Execution of TradeWhen you make a buy or sell order, most importantly you need to mention your client code to facilitate trading on your behalf. In addition, you need to specify the name of the company whose shares you are intending to buy/sell, the quantity you want to buy/sell and the price you want the security to be purchased/sold at. If you are trading online, in addition to above details you also need to know your login ID and username that your broker will provide you once you open an online trading account.

Payments

Payments of your purchases are be made via an Account Payee cheque/Demand Draft drawn in favor of the respective broker’s name. The payment should necessarily come from the bank account of the investor and not from any other person. Similarly the broker also pays by an Account Payee cheque in the name of the investor, which will also contain the Bank name and account number of the client.

It is important to note that no third party payments are either made or received by the stockbroker. Failing to do this may cause your transaction nullified and any losses arising has to be borne by the client.

Settlement of Trade

Settlement of TradeOnce you have bought or sold shares, the transaction is complete only when you get the shares you purchased and/or receive money for the shares you sold. This is called settlement in stock market terminology.

So does the stock exchange directly makes and collects the delivery of shares and money from its investors?

Well, it certainly does not happen this way. Rather, the stock exchange collects the money and shares from the stockbroker and similarly makes the delivery to the stockbroker who in turn collects it from the investor. The mechanism through which all parties to a transaction get their receivables i.e. either funds or shares is known as ‘clearing and settlement’ or simply ‘settlement’.

What is Rolling Settlement Cycle?

In a rolling settlement, each trading day is considered as a trading period and trades executed during the day are settled based on the net obligations for the day. At NSE and BSE, trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd working day. For arriving at the settlement day all intervening holidays, which include bank holidays, NSE/BSE holidays, Saturdays and Sundays are excluded. Typically trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on.

What is then pay-in and pay-out?

When you receive shares/money in your account it is called pay-out (from the exchange) and when you deliver shares/money from your account it is called pay-in (to the exchange).

As a seller, in order to ensure smooth settlement you should deliver the shares to your broker immediately after getting the contract note for sale but in any case before the pay-in day. The seller would need to transfer the shares to the pool account of the broker for the specified settlement number. The sale would then be finalized provided that the delivery of shares comes from the demat account of the investor and not from any other person. Similarly, as a buyer, one should pay immediately on the receipt of the contract note for purchase but in any case before the pay-in day. The broker, in this case, would directly transfer shares bought to the demat account of the investor.

The stock exchanges have a smooth mechanism in place to ensure that every trade is properly matched, and shares are received or delivered properly. In case of a shortfall of securities, an auction is resorted to close out the difference.

So that sounds a bit complicated? Do not worry. Once you actually get involved in a sale or purchase transaction yourself, you’ll be in a position to explain us too.

Note: The pay-out of funds and securities to the clients by Arihant takes place within 24 hours of the pay-out by the exchange*.

Documents investors need to collect from the broker in respect of trades

Document that an investor should receive from the broker/sub-broker in respect of trades

Contract note is confirmation of trades done on a particular day on your behalf. It establishes a legally enforceable relationship between you and the broker in respect of settlement of the trades. It helps to settle disputes/claims/differences.

You should receive from the broker a contract note indicating your transactions upon execution of your trades. Regulations require that you receive the contract note indicating details like Order Number, trade Number, Time, Price, Brokerage, etc within 24 hours of trade.

What happens if you are unable to make the payment of money?

What happens if you are unable to make the payment of money or deliver shares on time?

Well, in case of purchase on your behalf, the member broker has the liberty to close out transactions by selling securities, in case you fail to make full payment to the broker for the execution of contract before pay-in day as fixed by Stock Exchange for the concerned settlement period. Or you should have an equivalent credit with the broker to enable him to pay-in. The shortages in case of sales are met through auction process and the difference in price indicated in Contract Note and price received through auction is paid by member to the Exchange which is then liable to be recovered from the client.

Grievances against companies and brokers

What if you have a problem with the stock broker you are dealing it? What if the broker does not make the due payments to you or does not deliver your shares?

After all it’s the matter of your hard earned money or the capital that you have built. You need not worry about it, because the SEBI has mandated the respective exchanges to set up an Investor Grievances Cell wherein the investor’s problems are efficiently resolved.

Alternatively there are also consumer forums you can approach if there is some misconduct on part of your broker.

The Cell takes up complaints for redressal in respect of trades executed on the exchange or trades pertaining to companies traded on the exchange. You should lodge the complaints in the prescribed form with all associated documents such as contract note.

Now that you are well versed with the process of trading, let’s take an overdrive and assist you with ways of analyzing shares, building and monitoring your portfolios and maximizing your returns.


At Arihant we are committed to giving you the right resources, advice, services and tools to help you invest with ease in the Indian equities.

 

 

Not a Arihant Customer?

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Did you know?

Client-broker/client-sub-broker agreement:

While opening an account with a broker/sub-broker, you should sign the agreement indicating your relations with her/him and retain a copy with you. This will help you if any disagreement arises at a later stage.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Did you know?

You can invest in equities through mutual funds from as low as Rs. 50 per month (through Systematic Investment Plans) or Rs. 5,000 lump sum.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Did you know?

As per SEBI guidelines,

  • Initial margin shall be a minimum of 50% and maintenance margin shall be a minimum of 40% to be paid in cash.
  • An agreement has to be signed between the member and the client before starting margin trading.
  • The client cannot avail this facility from more than one broker.
  • After the close of the trading session, you have to settle all your dues by the next morning.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

But don't forget

In order to ensure that you get to buy the shares, you need to have margin or money in your trading account. Similarly, when you place an order for sale of the shares of a particular company, you must have the shares in your demat/delivery account. Failing to do this may result in:

  • Cancellation of your trade
  • Auction of the shares
  • May cause losses

 

 

 

 

 

 

 

What does 'Going short' mean?

You must have heard this phrase and wondered what does it really mean. Do not go by the literal words. Don’t worry; you are not going shorter in structure

In context of trading on stock exchange, when you do not have shares and you sell them it is known as going short on a stock.

But why would someone sell something when she does not own it? Generally a trader will go short if (s)he expects the price to decline. So you sell the shares right now at a higher price, and when the prices fall down, you buy it back again and cover your position.

In a rolling settlement cycle you will have to cover your short position by end of the day on which you had gone short. That means if you have sold the 100 shares of Tata Steel without actually having it with you, then you will have to buy the shares before 3.30 pm. Otherwise, exchange will purchase the shares on your behalf in the auction market and you will have to pay the loss that you would incur.

 

 

 

 

 

 

 

 

 

 

Speed up your trading

Did you know that you can get your Contract Notes by email? In a trading world where acting quickly can make all the difference, you could quickly see the benefits. And of course, you won’t just save yourself time but you’ll be helping to save paper as well.

To find out how easy it is to transfer your Contract Notes to email, just email us! Send your request

feedback@arihantcapital.com and we’ll do the rest.