Process Of Investing In Equity Stocks: Online And Offline

After you have built a portfolio investment strategy on the basis of your risk-return profile and a time horizon, you have to implement it. Stock trading can be done through two ways, either offline broking or online broking.

Offline investing

Opening accounts

To begin trading, you must first find a broker to execute your trades. Of late, most transactions are carried out in the electronic form. For this, you have to open a ‘demat account’ with a depository who should be registered with the regulatory authority. A depository is an organization which holds securities of investors in the electronic form at the request of the investors through a registered depository participant. It also provides services related to transactions in securities. After opening the demat account you should open a trading account with your broker. The broker issues contract notes detailing purchase and sale transactions, bills containing the charges (stamp duty, brokerage, securities transaction tax and service tax) levied on the purchase and sale transactions. SEBI (Securities and Exchange Board of India) prescribes guidelines for the rate at which charges are levied, the frequency of issuing contract notes and also the format.

Paying margins

Let’s say you strongly feel that the price of a stock will go up and so much so that you don’t mind taking some extra risk. You can make money by buying the stock now and selling it later when the price increases. But what if you don’t have the money to buy? Well, you could ‘go long’ on that stock; that is, you ask your broker to buy the stock without paying him the full amount now. Instead, you can pay him a token amount called the margin money. When you buy on margin you are actually buying stocks on credit. Your broker will lend you the part money if you have enough collateral in the form of adequate stocks in deposit with the broker. Since it’s a loan the broker is giving you, he will also charge you interest. You could have also borrowed money from some other sources to buy those stocks. But, usually brokers try to offer interest rates lower than other sources. Buying long allows you to buy more shares than you can afford. And, if your hunch about a stock’s price rise turns out to be correct, you stand to gain more than what you could have without a margin buy. But, the longer it takes for the stock to rise to the price level you had expected, the less will be your gain. To be safe, the stock price should rise enough to pay off the loan amount, the interest incurred and the transaction cost. Buying long becomes risky if your calculations go wrong. If it takes a much longer time for the stock price to reach the level than what you had estimated, your profits will reduce because by that time the interest cost on the borrowed money would also have risen. And if your estimate completely goes wrong and the stock’s price falls, you immediately start making losses. You break even when the stock price rises enough to pay off the loan amount, the interest incurred and the transaction cost.

Cost of investing in equity

You would incur costs when you open demat and trading accounts. Brokers usually have recurring and one-time charges (account opening fees). Recurring charges are the annual maintenance fee and the brokerages on transactions.

Brokerage is usually 0.25-0.85 percent of the transaction value or a flat rate (between Rs 10 and Rs 50) on a per trade basis, whichever is less. Some brokerages charge customers with large accounts less. Annual charges for the demat account can be anything between Rs 250 and Rs 750. The brokerage may or may not include service tax.

• If you are an active investor with a high trading turnover, brokerage charges will leave a dent on the profits. Obviously, the lower the percentage rate, the better.
• If you are a low volume investor — active or passive — a stiff minimum charge will hurt. Therefore, choose a broker or a Web trader who either does not specify a minimum charge or levies a low one.

Online trading

Opening accounts

Electronic trading (e-trading) connects buyers and sellers in geographically separate locations in a virtual trading platform. Now, you can use your computer via the internet to e-trade. With reference to shares, e-trading means the buying and selling of equity vielectronic means. In practical terms, you must register as a client with an e-broker as you do with a broker and can start trading.

Most banks offer online trading facilities and these are three-in-one accounts – that is, bank, demat and trading accounts. The expenses incurred here are the minimum balance one has to maintain with the bank, and the demat and the trading account opening charges. Normally the following charges are levied.

Account opening charges

Charges for opening an account stand at around Rs 700. This is inclusive of legal documentation charges. This amount will be debited from the customer’s savings account.

Brokerage

Various brokers may charge different rates but they cannot charge beyond that specified by the government and regulatory bodies. You may be charged at the rate of the higher of 0.5% of the transaction value or Rs 25. In case of a square off, brokerage will be charged at the rate of 0.15 per cent of the transaction value on each leg subject to a minimum of Rs 7.50 on each leg of the transaction.

For instance

If you buy 100 shares of X Ltd. at the rate of Rs 190, brokerage charged will be Rs 95 (0.5 per cent of 19,000). If you buy 10 shares of Y Ltd. at the rate of Rs 180, the brokerage charged will be Rs 25.

If you buy 100 shares of X Ltd. at the rate of Rs 190 and sell 100 shares of X Ltd at the rate of Rs 200 in the same settlement, brokerage will be charged at the rate of 0.15 per cent of 19,000 + 0.15 per cent of 20,000 = Rs 58.50

If you buy 10 shares of Y Ltd. at the rate of Rs 180 and sell 10 shares of Y Ltd at the rate of Rs 175 in the same settlement, brokerage will be charged at the rate of 7.5 +7.5 = Rs 15.

Bank charges

There are no account opening charges. A quarterly minimum balance will, however, have to be maintained.

Depository participant (DP) charges

There are no account opening charges. However, the DP will levy an annual maintenance charge as well as transaction charges for each trade.

Suitability

Online trading gives first-time and low-volume investors an edge over physical broker trading in terms of convenience. Also, it is more transparent. Banks that offer trading platforms make for seamless trading and payment options. The entire transaction process — from placing the order to making payments and delivery — takes place seamlessly, and requires minimal follow-up. In addition, the costs are largely the same regardless of whether you are trading offline or online.