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!!

ONLINE TRADING – Do’s and Don’ts

ONLINE TRADING – Do’s and Don’ts

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.
ONLINE TRADING Do’s and Don’ts

March 10th, 2010
ONLINE TRADING – Do’s and Don’ts

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.

MARGIN TRADING

What does the term term “Margin Trading” mean ?

Many times you would have come across a term Margin trading. What is trading on margin and how is it different from normal trading is what is explicated here. ‘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. 

• 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.