Demat Account

Demat Account Definition

Demat refers to a dematerialised account.

Though the company is under obligation to offer the securities in both physical and demat mode, you have the choice to receive the securities in either mode.

If you wish to have securities in demat mode, you need to indicate the name of the depository and also of the depository participant with whom you have depository account in your application.

It is, however desirable that you hold securities in demat form as physical securities carry the risk of being fake, forged or stolen.

Just as you have to open an account with a bank if you want to save your money, make cheque payments etc, Nowadays, you need to open a demat account if you want to buy or sell stocks.

HOW TO OPEN A DEMAT ACCOUNT ?

Opening an individual Demat account is a two-step process: You approach a DP and fill up the Demat account-opening booklet. The Web sites of the NSDL and the CDSL list the approved DPs. You will then receive an account number and a DP ID number for the account. Quote both the numbers in all future correspondence with your DPs.

So it is just like a bank account where actual money is replaced by shares. You have to approach the DPs (remember, they are like bank branches), to open your demat account. Let's say your portfolio of shares looks like this: 150 of Infosys, 50 of Wipro, 200 of HLL and 100 of ACC. All these will show in your demat account. So you don't have to possess any physical certificates showing that you own these shares. They are all held electronically in your account. As you buy and sell the shares, they are adjusted in your account. Just like a bank passbook or statement, the DP will provide you with periodic statements of holdings and transactions.

Is a demat account a must? Nowadays, practically all trades have to be settled in dematerialised form. Although the market regulator, the Securities and Exchange Board of India (SEBI), has allowed trades of upto 500 shares to be settled in physical form, nobody wants physical shares any more.

So a demat account is a must for trading and investing.

Most banks are also DP participants, as are many brokers.

You can choose your very own DP.

To get a list, visit the NSDL and CDSL websites and see who the registered DPs are.

A broker is separate from a DP. A broker is a member of the stock exchange, who buys and sells shares on his behalf and on behalf of his clients.

A DP will just give you an account to hold those shares.

You do not have to take the same DP that your broker takes. You can choose your own.

DEMAT ACCOUNT OPENING COST AND OTHER CHARGES

The cost of opening and holding a Demat account. There are four major charges usually levied on a Demat account: Account opening fee, annual maintenance fee, custodian fee and transaction fee. All the charges vary from DP to DP.

Depending on the DP, there may or may not be an opening account fee. Private banks, such as ICICI Bank, HDFC bank and UTI bank, do not have it. However, players such as Karvy Consultants and the State Bank of India charge it. But most players levy this when you re-open a Demat account, though the Stock Holding Corporation offers a lifetime account opening fee, which allows you to hold on to your Demat account over a long period. This fee is refundable.

Annual maintenance fee: This is also known as folio maintenance charges, and is generally levied in advance.

Custodian fee: This fee is charged monthly and depends on the number of securities (international securities identification numbers – ISIN) held in the account. It generally ranges between Rs. 0.5 to Rs. 1 per ISIN per month.

DPs will not charge custody fee for ISIN on which the companies have paid one-time custody charges to the depository.

Transaction fee: The transaction fee is charged for crediting/debiting securities to and from the account on a monthly basis. While some DPs, such as SBI, charge a flat fee per transaction, HDFC Bank and ICICI Bank peg the fee to he transaction value, subject to a minimum amount.

The fee also differs based on the kind of transaction (buying or selling). Some DPs charge only for debiting the securities while others charge for both. The DPs also charge if your instruction to buy/sell fails or is rejected.

In addition, service tax is also charged by the DPs.

IPO – Initial Public Offering

IPO – Initial Public Offering

Public issues can be classified into Initial Public offerings and further public offerings. In a public offering, the issuer makes an offer for new investors to enter its shareholding family. The issuer company makes detailed disclosures as per the DIP guidelines in its offer document and offers it for subscription. Initial Public Offering (IPO ) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities.

IPO is New shares Offered to the public in the Primary Market .The first time the company is traded on the stock exchange. A prospectus is issued to read about its risk before investing. IPO is A company's first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. Investors purchasing stock in IPOs generally must be prepared to accept very large risks for the possibility of large gains. Sometimes, Just before the IPO is launched, Existing share Holders get a very liberal bonus issues as a reward for their faith in risking money when the project was new

How to apply to a public issue ?

When a company floats a public issue or IPO, it prints forms for application to be filled by the investors. Public issues are open for a few days only. As per law, any public issue should be kept open for a minimum of 3days and a maximum of 21 days. For issues, which are underwritten by financial institutions, the offer should be kept open for a minimum of 3 days and a maximum of 21 days. For issues, which are underwritten by all India financial institutions, the offer should be kept open for a maximum of 10 days. Generally, issues are kept open for only 3 to 4 days. The duly complete application from, accompanied by cash, cheque, DD or stock invest should be deposited before the closing date as per the instruction on the from. IPO's by investment companies (closed end funds) usually contain underwriting fees which represent a load to buyers.

Before applying for any IPO , analyse the following factors:

1. Who are the Promoters ? What is their credibility and track record ?

2. What is the company manufacturing or providing services - Product, its potential

3. Does the Company have any Technology tie-up ? if yes , What is the reputation of the collaborators

4. What has been the past performance of the Company offering the IPO ?

5. What is the Project cost, What are the means of financing and profitability projections ?

6. What are the Risk factors involved ?

7. Who has appraised the Project ? In India Projects apprised by IDBI and ICICI have more credibility than small Merchant Bankers

How to make payments for IPOs:

The payment terms of any IPO or Public issue is fixed by the company keeping in view its fund requirements and the statutory regulations. In general, companies stipulate that either the entire money should be paid along with the application or 50 percent of the entire amount be paid along with the application and rest on allotment. However, if the funds requirements is staggered, the company may ask for the money in calls, that is, the company demands for the money after allotment as and when the cash flow demands. As per the statutory requirements, for public issue large than Rs. 250 crore, the money is to be collected as under:

25 per cent on application

25 per cent on allotment

50 per cent in two or more calls

Battle between Bulls and Bears

                 While making a buy/sell decision of a specific stock, if you have ever got a chance to see the stock chart, there is a lesser probability that you haven’t come across “support” and “resistance” levels of the stock. What are support and resistance levels and how are these significant for stocks and for entire index in general is what we would see here!!

                 Almost every stock has both a level of support and a level of resistance and usually it trades in this range bouncing between these levels. In very simpler words, Support level is the price where a falling stock finds its support and will not go down beyond this. Similarly, resistance level is the price level which a rising stocks finds difficult to overcome or cross. The definition here implicitly indicates its importance in buy/sell decision.  Let’s understand in detail how??
 


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.

Your Trading Cost

 Break up of brokerage you pay to your broker:

                         There is no denying the fact that earning from stock market is an art, not just speculation, forecasting and analysis. Whether you are a retail investor or a big fund, one question you should ask yourself is “what is your trading cost”?. How much part of your earning are you passing on to your broker in the form of commissions because it really affects your “profit margin”

                          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!!