what is brokerage cost?

Keep an eye on brokerage costs.

Hi there,

The cost associated with buying and selling shares are very tricky. Ask any relationship manager of a broking house about the commission they charge and he would readily come up with this answer- “.05% for intra day trades and .50% for delivery”. If you try t0 walk away, he’ll come back with his second offer of “.04% for intra day and .40% for delivery”. This can go down even to .01 for intra day and .10% for delivery!

• Tip: Although you may finally select a broker, make sure that the brokerage applied on transactions is in line with the offer he made initially. You need to check the brokerage applied by your broker periodically.
• Brokers charge an amount called ‘Annual maintenance charges’ from your account. Check those charges. If they are charging AMC every month, it eats into your invested fund. The best option is to  pay a lumpsum amount while joining and get exempted from AMC being charged monthly. Generally, Borkers charge a lumpsum  of around Rs 500 – 750  for a life time.

The effective rate of brokerage, however, is different from the above percentages. Apart from brokerage there are other related costs which these managers don’t talk about. Before getting further into the topic we need to understand what the terms ‘intra day’ and ‘delivery’ mean. Let’s see-

Intra day - Intraday Trading, also known as Day Trading means you buy a stock and sell that position before the end of that day’s trading session thereby making a profit or loss for you. A buy position and a sell position of same number of shares of a company – All in one day’s trading session. Thus, intraday means trading in a day. In intra day trading, brokerage is low in comparison to the delivery.

Delivery- You do not square off your position in a day session. Instead, you decide to hold the shares till the next trading session or till 20 years or till your target is reached.

Now let’s talk about what those charges are. Since the topic is about brokerage , i have also mentioned about the brokerages on derivatives transaction.

RATES OF BROKERAGE

The net trading cost is computed as below:

• Trading cost = Brokerage + STT + Stamp duty + other charges

Now lets try to separate all the cost components-

Brokerage: It is calculated at the agreed percentage, on the total cost of shares bought or sold. If you are charged .03% for intraday and .30% on delivery, the basic brokerage figure would be as follows-

• Market price of the share x number of shares x .03% (intra day)
• Market price of the share x number of shares x .30% (delivery)

Securities transaction tax- It is imposed on the sale/purchase of securities by investors and is charged on total turnover. It is charged as follows:

• Equity Delivery Transactions
  Purchase: 0.125% of Turnover i.e. (Number of Shares * Price)
  Sell: 0.125% of Turnover i.e. (Number of Shares * Price)

• Equity Intra-day Transactions
  Purchase: NIL
  Sell: 0.025% of Turnover i.e. (Number of Shares * Price)

• Future Transactions
  Purchase: NIL
  Sell: 0.017% of Turnover i.e. (Number of Lots * Lot Size * Price)

• Option Transactions
  Purchase: NIL at the time of purchase of option. However the purchaser has to pay 0.125% of the Settlement Price i.e. (Number of Lots * Lot Size * Strike Price), in case of option exercise
  Sell: 0.017% of Premium

Transaction charges: There is a very slight difference in the rate of transaction charges for NSE and the BSE.

• Equity Delivery Transactions
  Purchase: 0.0035% of turnover in NSE and 0.0034% of Turnover in BSE
  Sell: 0.0035% of turnover in NSE and 0.0034% of Turnover in BSE

• Equity Intra-day Transactions
  Purchase: 0.0035% of Turnover in NSE and 0.0034% of Turnover in BSE
  Sell: 0.0035% of Turnover in NSE and 0.0034% of Turnover in BSE

• Future Transactions
  Purchase: 0.002% of Turnover i.e. (Number of Lots * Lot Size * Price)
  Sell: 0.002% of Turnover i.e. (Number of Lots * Lot Size * Price)

• Option Transactions
  Purchase: 0.05% of Premium
  Sell: 0.05% of Premium

SEBI turnover charges: For equity transaction, this remains NIL but for derivative transactions, it is charged @ 0.0002% of total turnover. The calculation would be as follows.

• Equity Delivery Transactions
  Purchase: NIL
  Sell: NIL

• Equity Intra-day Transactions
  Purchase: NIL
  Sell: NIL

• Future Transactions
  Purchase: 0.0002% of Turnover i.e. (Number of Lots * Lot Size * Price)
  Sell: 0.0002% of Turnover i.e. (Number of Lots * Lot Size * Price)

• Option Transactions
  Purchase: 0.0002% of Premium
  Sell: 0.0002% of Notional Value in case of exercise or assignment

Stamp Duty

• Equity Delivery Transactions
  Purchase: 0.01% of Turnover. Turnover usually taken in multiple of Rs 5000
  Sell: 0.01% of Turnover. Turnover usually taken in multiple of Rs 5000

• Equity Intra-day Transactions
  Purchase: 0.002% of Turnover. Turnover usually taken in multiple of Rs 5000
  Sell: 0.002% of Turnover. Turnover usually taken in multiple of Rs 5000

• Future Transactions
  Purchase: 0.002% of Turnover. Turnover usually taken in multiple of Rs 5000
  Sell: 0.002% of Turnover. Turnover usually taken in multiple of Rs 5000

• Option Transactions
  Purchase: 0.002% of Premium
  Sell: 0.002% of Notional Value in case of exercise or assignment

Service Tax

Service Tax, Surcharge and Education Cess are applicable only on Brokerage. No Service Tax, Surcharge and Education Cess are not applicable on Securities Transaction Tax (STT) etc..Service tax is levied at 10.30%.

EXAMPLE:

Now let’s assume that you purchased 10 ICICI bank’s share at Rs 868.00 through NSE. Assuming that the brokerage charged is .05% for intra day and .50% for delivery, the total cost of the share (for delivery) would be calculated as follows:

Basic brokerage:

• Rs 868 x .50% = Rs 4.34
• Security transaction charge = 868 x 10 x 0.125% =Rs 11
• Transaction charge = Rs 0.32
• SEBI turnover charges = NIL
• Stamp duty = Rs 0.87
• Service tax  = 4.47
• Total cost of 10 shares @ 868 = Rs 8740.06

When you buy shares, these figures will appear on your digital contract note sent to you via mail. It’s important to keep a print out of those digital contract notes in a file. Brokerages are very important costs associated with stocks and you cannot afford to ignore it. You have to be vigilant on the amount you are paying. Periodic check of your ledger account is necessary.

The brokerage affects investors in different ways. For infrequent traders, a higher brokerage would lengthen the amount of time required to break even. If you are a high volume trader, a large brokerage will eat into their overall return. Now, hope you’ve understood the cost structure involved with stock transactions in India.

Have a nice day !

UNDERSTANDING 'PEG RATIO'

UNDERSTANDING 'PEG RATIO'

PEG RATIO

Popularized by the legendary Peter Lynch, It’s a  ratio that will help you look at future earnings growth  You calculate the PEG by taking the P/E and dividing it by the projected growth in earnings.

• PEG = (P/E) / (projected growth in earnings)

For example, a stock with a P/E of 20 and projected earning growth next year of 10% would have a PEG of 20 / 10 = 2.

WHAT DOES IT SHOW?

Consider this situation; you have a stock with a low P/E. Since the stock is has a low P/E, you start do wonder why the stock has a low P/E. Is it that the stock market does not like the stock? Or is it that the stock market has overlooked a stock that is actually fundamentally very strong and of good value?

To find the answer, PEG ratio would help. Now, if the PEG ratio is big (or close to the P/E ratio), you can understand that this is probably because the “projected growth earnings” are low. This is the kind of stock that the stock market thinks is of not much value.

On the other hand, if the PEG ratio is small (or very small as compared to the P/E ratio, then you know that it is a valuable stock) you know that the projected earnings must be high. You know that this is the kind of fundamentally strong stock that the market has overlooked for some reason.

WHAT IS THE RIGHT PEG?

There are no hard and fast rules regarding the right PEG ratio. Normally, A PEG Ratio of 2 or below is considered excellent. A PEG Ratio of 2 to 3 is considered OK. A PEG Ratio above 3 usually means that the company’s stock is over priced.

Technically speaking

If PEG ratio=1, it means that  the share at today’s prices is fairly valued.

If PEG ratio>1, it indicates that the share is possibly over-valued.

PEG ratio<1, it indicates that  the share is possibly under-valued.

PROBLEMS WITH PEG.

The first problem is the P/E itself. Which P/E should be used for this? Is it the trailing P/E or the forward P/E? What ever P/E you may use, the ‘E’ factor in P/E   is a number not fully trusted by analysts due to the estimates that go with it.

Second, difficult part is the estimation of growth rate figures. Flaws in estimating both these figures would affect the results obtained by the PEG analysis.

What Peter Lynch has said in his one up on wall street is that “the P/E ratio of any company that’s fairly priced will equal its growth rate”. Therefore, according to him, a properly priced company will have a PEG of 1. But what if the growth rate is 0? So, the ratio doesn’t work well for all stocks . It works for a stock with normal rate of growth and earnings.

CONCLUSION.

The two most important numbers that investment analysts look at when evaluating a stock are the P/E ratio and the PEG ratio. The PEG is a valuable tool for investors to use. It reveals whether the high price of a stock is justified based on whether earnings will grow enough to continue to drive the stock higher.

a message from BSE

                                   

Investor protection – Message from the Bombay Stock Exchange

       

The Investor Protection Fund of the Bombay Stock Exchange Ltd has laid out certain Do’s and Don’ts for investors to alert them to the attendant risks associated with trading in stocks.

DO’s

• Always deal with the market intermediaries registered with the Securities and Exchange Board of India (Sebi) / stock exchanges.
• Give clear and unambiguous instructions to your broker / agent / depository participant.
• Always insist on contract notes from your broker. In case of doubt of the transactions, verify the genuineness of the same on the exchange Web site (http://www.bseindia.com).
• Always settle the dues through the normal banking channels with the market intermediaries.
• Before placing an order with the market intermediaries please check about the credentials of the companies, its management, its fundamentals and recent announcements made by them and various other disclosures made under various regulations. The sources of information are the websites of exchanges and companies, databases of data vendor, business magazines, et cetera.
• Adopt trading / investment strategies commensurate with your risk-bearing capacity as all investments carry risk, the degree of which varies according to the investment strategy adopted.
• Please carry out due diligence before registering as client with any Intermediary. Further, investors are requested to carefully read and understand the contents stated in the Risk Disclosure Document, which forms part of investor registration requirement for dealing through brokers in the stock market.
• Be cautious about stocks, which show a sudden spurt in price or trading activity, especially low price stocks.
• Please be informed that there are no guaranteed returns on investment in stock markets.

DONT’s

• Don’t deal with unregistered brokers / sub-brokers, intermediaries.
• Don’t deal based on rumours generally called ‘tips’.
• Don’t fall prey to promises of guaranteed returns.
• Don’t get misled by companies showing approvals / registrations from Government agencies as the approvals could be for certain other purposes and not for the securities you are buying.
• Don’t leave the custody of your demat transaction slip book in the hands of any intermediary.
• Don’t get carried away with onslaught of advertisements about the financial performance of companies in print and electronic media.
• Don’t blindly follow media reports on corporate developments, as they could be misleading.
• Don’t blindly imitate investment decisions of others who may have profited from their investment decisions.
• For the benefit of investors, the exchange has installed a Toll Free line 1600 22 6663, wherein they can inform on any specific lead with regard to any type of undesirable trading practices in any scrip or any type of market aberration observed by them. Investors are hereby requested to get their messages recorded in English or Hindi. Identity of the investor will be kept confidentia

contrarian investment

Stock investing strategy: Contrarian Investing.

Following a strategy of going against the current views of the majority investors is called contrarian investing. Why do such investors take a contrary view? Because, they believe that certain consensus among investors can lead to wide mispricings in securities markets.

For example: A wide spread negative news or rumors about a stock may send the prices of that stock crashing. These investors try to spot such stocks and invest in it resulting in above average returns.

CONTRARIAN -THE BOLD APPROACH

A true contrarian is neither bullish nor bearish on securities. A contrarian investor takes a bold approach. The goal of a contrarian investor is to profit from the mispricings that an irrational market creates. Something similar to value investing. The only difference here is that, this approach relies more on market sentiments and investor behavior. Contrarian investing has more opportunities in markets which are emerging out of a bear phase. Typically, in such markets many stocks, which have a strong growth potential, quote at attractive valuations primarily because investors widely extrapolate news flow and performance of the recent past.

MISPRICED STOCKS

Contrarian investing works because of the psychology of market participants. During the beginning of a trend, buyers are cautious, and the more seasoned players are the primary participants. As the trend gains traction, more and more investors become aware of it, deploying more capital to take advantage of the market’s strength. Then at the end of the trend, when everyone who’s interested in buying into the trend already had — with no more available capital to sustain the already inflated prices, it’s incredibly easy for a panic to make stock prices tumble down.

A perfect example of this was the 2008 market crash. The trend started and it continued till all those who were interested in buying into the trend has put in their money. Then, Stocks sold off hard, all the seasoned players made money and the crowd was left with stocks purchased at higher prices. The prices of stocks tumbled and the crowd, unable to hold on, sold their stocks suffering heavy financial loss. At this point, the smart guys step in again and then, dramatically the stock regains much of that lost ground in 2010. This was a classic case of the crowd dramatically shifting sentiment. Those who thought opposite to what the crowd thought would have definitely made lot of money.

DOES IT WORK IN INDIAN MARKETS?

Emotions play a huge part in Indian stock markets. Right from horoscopes to palm reading and tarot cards, there’s lot of ‘shastras’ that Indians rely on to take financial decisions.   Otherwise, the stock market wouldn’t have crossed 21000 in January 2008, tumble to 7600 points in October 2008 and then again cross 21000 in November 2010. More than earnings data, sentiments played a major role in this huge fluctuation.

According to Mr. Ved Prakash of Tata mutual fund, “The strategy of contrarian investing works in most markets. Contrarian investing focuses on looking at companies with a long-term potential who are out of favour either because they are misunderstood or because their short-term expected performance is below market expectations or there is short-term negative news flow which is clouding the otherwise strong potential of the business”.

So, where emotions or expectations are high, contrarian approach works well. The crowd will always be caught on the wrong side when the market turns upside down.

SPOTTING THE TURNING POINTS

So, then, if turning points are where the crowd is wrong, the biggest challenge is spotting them. You can spot turning points through fundamentals or technicals or by studying the general economic indicators.

1. Valuation

The theory behind valuation is simple. Buy when stocks look fundamentally cheap. Sell when the stock is expensive. Valuation, however, is not an easy process. It requires a strong understanding of fundamental analysis; it also requires its practitioner to attempt to make an objective decision about a subjective topic like “value.”

2. Technical Analysis

Another option for contrarians is to use technical analysis to spot reversals. Momentum, trend breaks, volumes, RSI all come into play here.

3. Quantitative and Economic Indicators

The last method skips looking directly at a security’s price and looks at broader economic indicators such as volatility index to spot turnarounds.

CONCLUSION.

Tracking these indicators- not any one of them –but all of them together, may help you to take a contrary position before the market starts to correct itself. Successful contrarians realize that turning points are key. So next time, I hope this little advice would help you to avoid getting trapped in a market crash and at the same time help you to spot turnarounds and profit from it.

INITIAL PUBLIC OFFERS (IPO)

The Only 2 ways to buy stocks – Primary markets & Secondary markets.

Hi there,

So far what I have discussed is about share markets or secondary markets. I haven’t talked about primary markets in detail. That’s a basic topic which I should have discussed earlier. So let’s catch up with the topic.

So, there’s only two ways you can buy a stock.

• 1. Through stock markets – those gigantic auction houses where millions of shares are exchanged. ( Also called secondary market)
• 2. IPO’s or initial public offers ( Also called primary market)

WHAT’S THE DFFERENCE?

Companies raise money for expansion through initial public offers. As the name suggests, IPO’s are fresh issue of shares to the public. The money you pay by subscribing shares goes to the company for its expansion plans.So when a company is getting listed for the first time at the stock exchange and issues shares – this process is undertaken at the primary market.Existing companies, who have already issued shares, ,may require additional money for further expansion. If they wish, they can tap if from the primary market . Such share issues will be called ‘follow on issues’.

When you buy shares in the secondary market ( stock markets) , the money which you pay goes to the seller of the shares and not to the company.Generally when we speak about investing or trading at the stock market we mean trading at the secondary stock market. It is the secondary market where we can invest and trade in the stocks to get the profit from our stock market investment.

ISSUE OF SHARES: Face value vs Premium.

When a company launches an IPO to the public, it can offer those shares at ‘face value’ or at a ‘Premium’.

Shares carry a fixed rate, as declared in the legal documents of the company. It’s also called ‘par value’. For example, a company may issue 10 lakhs shares of Rs 10 each at par.

Over and above the fixed rate, a company can issue shares at a premium from its subscribers if the management is able to justify the reason for such premium. For example, a company may issue 10 lakh shares of Rs 10 each at a premium of Rs 50. So the total cost of one share becomes Rs 60.

WHY NOT AT DISCOUNT?

Yes, theoretically speaking, shares can be issued at a discount also. Practically, nobody does that. Shares are either issued at par or at a premium.

IT’s NO EASY PROCESS

To successfully complete the share issue process, a company will have to appoint a lot of intermediaries like –

• Lead managers who would take care of all the paper work with SEBI and other regulatory authorities, with the stock exchanges, bankers, Underwriters, allotment of shares.. in short, everything  from A to Z
• Bankers to the issue who would ensure the collection of funds from the public.
• Registrars to the issue who would scrutinize the applications, reject the disqualified ones and allot the shares to eligible allotees , transfer those shares to their demat accounts and refund the amount to unsuccessful applicants.
• Underwriters who would ‘undertake’ to buy the shares that are not taken up by the public so that the IPO is complete.

PRICING OF SHARE ISSUES.

Shares issued through an IPO can be priced in two ways. First method is straight forward – The company can decide the price at which it will offer it’s shares.

The second method is – The Company, in consultation with the lead managers, would fix a ‘price band’ for the issue. The price band is nothing but a range.  For example If the issue document says that the shares are issued in a price band of Rs 50 to Rs 75. It means, that the investors willing to subscribe the shares are free to bid for any price between that range. The lower end of the band is called the ‘floor price’ and the upper end of the band is called the ‘cap’.

The highest price at which there are maximum numbers of subscribers is taken as the issue price. All bids at or above this price are valid bids and considered for allotment.

INVESTORS WHO CAN INVEST IN AN IPO

The total issue of shares is divided into three parts for three categories of investors. These categories are:

• Retail investors – For You, me, residents, NRIs and Hindu undivided families, whose share application size is less than Rs 1 lakh, 35% of the issue is kept aside.
• Qualified institutional bidders: For mutual funds, banks, insurance companies, foreign institutional investors etc 50% of the issue is kept aside.
• Non-institutional bidders – individuals, companies, NRI’s, HUFs, societies, trusts whose share application size is more than 1 lakh, the balance 15% is given.

This being an article In our primary section, I’m keeping things simple in a layman’s language. We will take up the IPO issue process in our advanced lessons series.

Bye for now..

Have a nice time!

Value investing common sense.

Value investing common sense.

Whether you do simple valuation process or very complicated methods, remember that value is a relative measure. What you’re trying to find is a bargain. Opportunity to buy shares at a bargain generally arises when something is out of favor.

Always look for moderately undervalued shares rather than trying to find out grossly undervalued shares. If a share is grossly undervalued, it means that there is something terribly wrong with that company.

You should be able to justify why you bought a share and before buying, make sure you know what would make you sell the stock.

Never compare your decisions with others. If you are ready to buy a stock at a particular rate for a reason, there’s someone equally ready to sell that stock for some other reason. So, it’s natural; for others to think contrary to your views.

Book profits periodically. All the profits you make are of no use unless you monetize it and put that money in your pocket.

Stock markets are full of opportunities every time. You need not worry if one investment you made ends up in loss. Loss is part of the game.  What’s important in such circumstances is to recognize the mistake you made and try to book loss and come out. Treat that loss as the cost of the mistake you made and forget it.

As and when you find an under valued stock, don’t rush and put in all your money in one go. Always invest gradually so that you have some cash on hand for unexpected opportunities or needs.

Stock investments carry risk. That’s definite.  Risk and rewards are sides of the same coin. If you have taken very les risk, you need to expect only corresponding returns. Do not expect high rewards by taking less risk. That’s an illogical expectation. Less risk,  less reward- that’s the rule in stock markets.

Always try to value companies that do business you are familiar with. It helps you to take better decisions to buy and sell. Deal with businesses you Know.

Hold a maximum of 10-15 stocks. The more stocks you own, the harder it is to monitor what happens to each of them. Of course, diversification can limit losses, but it can also limit gains. It’s also important to diversify at the bottoms. Buy and diversify more when valuations hit bottoms.

You find 3 undervalued stocks- a large cap, Midcap and a small cap. Which one would you opt to invest in? Always opt for large caps first. Larger companies have more analysts following them and greater transparency and are less likely to have trouble someone does not see.

Value investing doesn’t need the quick reflex of a trader. You have ample time to think and pre plan everything. So, never act on your emotions.

Finally – always remember these 3 time tested buzz words of value investing – patience, patience, patience.

Stock Market timings.

Stock Market timings.

INDIAN MARKETS

Trading on the Indian equities segment takes place on all weekdays.

There is No trading on Saturday, Sunday and Published Indian Stock Market Holidays declared by the Indian Stock Exchange in advance.

• The Market Opens at: 09:15 hours and Closes at: 15:30 hours
• Pre open trade session will be from 09:00 ~ 09:15 hours

Pre-open trade session is a 15 minute trade session from 9:00AM to 9:15AM on the 50 stocks of NIFTY index .

Only 50 stocks of the NIFTY index can be traded during this time on both NSE and BSE. Normal trading for all other stocks will start at 9:15AM till 3:30PM.

WHY PRE MARKET SESSION?

In case a major event or announcement comes overnight before market opens, such events are likely to bring heavy volatility on the next day when the market opens. Special events include merger and acquisition announcements, open offers, delistings, debt-restructurings, credit-rating downgrades etc which may have a deep impact on investors wealth. In order to stabilize this, pre open call auction is conducted to discover the right price and to reduce volatility.

BREAK-UP OF 15 MINUTES

The 15 minutes of pre open session is broken into 8 + 4 + 3.

The first 8 minutes:  During this session investors can place/ modify /cancel orders on the basis of which the exchanges would determine the rates at which trading would happen. Orders are not accepted after this initial 8 minutes.

Limit orders will get priority over market orders at the time of execution of trades .All orders shall be disclosed in full quantity, i.e. orders where revealed quantity function is enabled, will not be allowed during the pre-open session

In the next four minutes, orders are matched, executable price is discovered and trades are confirmed. The next 3 minutes is just a buffer period for transmission from pre-market session to normal market session.

PRICE DISCOVERY

The equilibrium price shall be the price at which the maximum volume is executable. That is, the price at which there are maximum number of buy orders and sell orders.

In case of more than one price meets the said criteria, the equilibrium price shall be the price at which there is minimum order imbalance quantity (unmatched qty).

Further, in case more than one price has same minimum order imbalance quantity, the equilibrium price shall be the price closest to previous day’s closing price. In case the previous day’s closing price is the mid-value of a pair of prices which are closest to it, then the previous day’s closing price itself shall be taken as the equilibrium price. In case of corporate action, previous day’s closing price shall be the adjustable closing price or the base price.

• If the price is not discovered in pre-open session then the orders entered in the pre-open session will be shifted to the order book of the normal market following time priority. The price of the first trade in the normal market shall be the opening price.
• Price band of 20% shall be applicable on the securities during pre-open session.
• In case the index breaches the prescribed threshold limit upon the closure of pre-open session, the procedure as prescribed in SEBI Circular Ref. No.SMDRPD/Policy/Cir-37 /2001 dated June 28, 2001 shall be applicable from the time continuous normal market opens.
• what the circular says is about circuit limits. In case of 20% movement in the index, trading will be halted for reminder of the day.

There is also a 15  minute video on this topic by Dr. Sayee Srinivasan , Head Product Strategy, at BSE. Watch it here.

REGIONAL STOCK MARKETS

Apart from the BSE and NSE, there are 21 regional exchanges which open at normal hours 9:15  to 15:30 hrs.

WORLD MARKET TIMINGS

Apart from this, global trends in stocks also affect the Indian market when it opens. Here’s a list of opening time of stock markets around the world.

WORLD STOCK MARKET TIME ACCORDING TO IST.

• Shanghai stock exchange  – Opens at 7.30 Am
• Hong Kong stock exchange -  Opens at 7.55 Am
• Tokyo stock exchange  - Opens at 5.50 Am
• South Korea – Opens at 5.50 Am
• NYSE, New York  – Opens at 8.30 Pm
• NASDAQ  – Opens at 8.30 Pm
• BOVESPA , Brazil – Opens at 7 Pm
• Bogota,  Columbia – Opens at 7 Pm
• Dow Jones – Opens at 7.30 Pm