Preview only show first 10 pages with watermark. For full document please download

Mechanism Of Brokerage




Mechanism of brokerage charged by depository participants A brokerage is a firm that acts as an intermediary between a purchaser and a seller. More commonly, a brokerage is referred to as a brokerage firm. To broker a deal is to communicate with both the buyer and seller as to acceptable price on anything sold or purchased. An individual desirous of buying or selling securities can do so by two methods. He can approach any other individual and transact. This process is called an ’Off  Market Transaction’. This process is cumbersome, as it is difficult to find a willing counterparty. To make this process easy, securities need to be liquid, i.e., easily available. This is done through a platform called the ’Stock Exchange’, where willing parties transact through an intermediary called a broker. Transactions Tr ansactions may also occur  through a sub-broker, i.e., an agent of a broker. As per the Securities and Exchange Board of India (SEBI) rules, only registered brokers and sub-brokers can buy, sell or deal in securities. It is, hence, essential for an investor to open an account with a  broker before he starts buying or selling securities. Selecting a depository participant: Gone are the days when shares were bought and sold in physical form. In India, securities are, today, transacted in electronic form, which is made possible by the process of dematerialisation (demat). A demat account is where your securities are kept in electronic form. Just like a bank  account is opened with a bank, a demat account is opened with a Depository Participant (DP). DPs are authorised by law in India to open demat accounts and are agents of the depository, acting as intermediaries between you and the depository. The DP set up works on a book entry form where shares are debited and credited as and when clients buy or sell. A buy transaction results in credit entry while a sell transaction leads to a debit entry. It is important for you to know that now DPs are not allowed to charge for opening accounts, crediting demat accounts and transfer of accounts from f rom one DP to another, if the account is in the same name. Further, some broker DPs, don’t charge separately for demat accounts. However they club these charges along with  brokerage. You must therefore clarify with broker DPs regarding the charges. Accessibility: Since you get only two days to transfer shares from your account to the broker’s account in case of a sale, you must check whether the DP is easily accessible or not. Investors who have opened demat accounts with DPs, who are registered with NSDL and CDSL for electronic transfer of shares, can avail of this facility. This means that you need not visit the DP’s office personally to submit the delivery instruction slip meant to transfer shares from your account to the broker’s account. It would therefore be better if you avoid those DPs who do not offer  electronic transfer facility and are not well spread geographically. Requirements for opening a broking account : The following documents are essential to open a broking account: Proof of residence (A list of acceptable documents provided) Proof of identity (Since PAN is must, it is used as POI) Bank account details (cancelled cheque for direct debits and credits) Brokerage & Stamp Duty BSE has not prescribed any minimum brokerage, and hence the same is negotiable. Though the maximum brokerage allowed is 2.5% percent of the contract price, the  brokerage generally charged by the Members is much lower. A Member may have different scales of brokerages for delivery transactions, trading transactions and the like. The present duty for equity shares transfer is 25paise for every Rs.100 or part thereof, on the amount of consideration while the duty for transfer of debentures varies from state to state, applicable on the basis of the location of the registered office of the concerned issuing company. Brokerage is usually negotiable: Several of you trying to choose an online broker  and open an online trading account must have been frustrated trying to search for  the exact brokerage charges charged by various online brokers. But the fact is the  brokerage charged by the same broker varies and in several cases is negotiable. For  example if you go and tell a brokerage house that you are going to deposit 2 lakh rupees and try to convince them you are going to trade heavily, they might consider reducing your brokerage. That is why in the above table you will find only a range for the brokerage charges in some cases. But that should be enough to get an idea. Effective brokerage with taxes is more: In addition to the above brokerage charges you will have to pay STT (Securities Transaction Tax) at the rate or 0.02% of  the total transaction amount. You will also be charged 12.5% Service Tax on the  brokerage amount (and not on the transaction amount). For example, if your brokerage is 0.50% for delivery and you do a delivery transaction of Rs.100/- then the total brokerage you pay is 0.50 (brokerage) + 0.02 (stt) + 0.063 (service tax) = 0.58 . Thus your effective brokerage (including all taxes) will be 0.58%. Similarly for brokerage on intraday transactions. One may also like to compare brokerages charged by the online brokers mentioned above for trading in futures and options. For futures, some online brokers charge different brokerage for different legs of the trade, i.e. different for buy and sell trade. Trades • • • • • • • Supports import of all files BSE & NSE including BSE Auction file. Unique trade edit screen that displays Order ID, trade ID, terminal No, time,  brokerage, brokerage %, brokerage type, net rate, standard rate for each trade and with shortcuts to recalculate brokerages, search, split etc. Provision to apply absolute brokerage on multiple trades on select & apply  basis. All processes required for Institutional Business. Automatic effect for Custodial trades. Facility to accumulate trades and allocate quantity based on MF / PMS scheme details provided in XLS file. Generate files for most front office software for new client creation and limit setting, including additional limit file for BTST. Brokerages • • • • • • For each slab a Minimum / Percent / Maximum / Fixed brokerage may  be defined. Minimum Brokerage per contract may also be defined. Speculation, squaring off and delivery brokerages can be defined for  same client. Brokerage discounts may be offered based on daily turnover. Sharing of brokerage based on % of brokerage charged to client or on  bases of excess charged over a decided base brokerage. Report also available to check if any such sharing results in negative income for  the broker. Introducing person’s brokerage may be credited to their accounts along with settlement posting or can be calculated periodically. Charges o Various charges that may be levied over and above brokerage and may be specifically shown in contract / Bill. Delivery charge (brokerage being charged as a separate charge entry) Service Tax STT Turnover Charges Stamp Duty Demat Delivery Charges (to recover charges charged by DP) Any other charge that may be based on turnover, brokerage etc. Facility to levy service tax on charges.        o ONLINE BROKERS Indiainfoline sharekhan religare indiabulls BROKERAGE FOR DELIVERY 0.50% 0.03% - 0.50% 0.20%-0.30% 0.25%-0.50% BROKERAGE FOR INTRADAY TRADING 0.10% 0.03% - 0.10% 0.02%-0.03% 0.05%-0.10% MNC nil Icici direct 0.75% 0.15% Brokerage charged by indiabulls 0.25% - 0.50% (brokerage for delivery) 0.05% - 0.10% (brokerage for intraday) Understand the fees and taxes of buying and selling shares Let’s consider the following case. Anurag buys a share of Rs. 1000 and sells it for  Rs. 1005.Will I make a profit of Rs. 5.  No I will not, We need to consider the cost of transactions also, which is being explained below:- TYPES OF CHARGE BROKERAGE CHARGE FOR DILEVERY SECURITY TRANSACTION CHARGES(STT) SERVICE TAX(ST) STAMP CHARGES TRANSACTION CHARGE SEBI FEES TOTAL RATE .35% 0.125% 0.035% 0.01% 0.0036% 0.001% 0.5246% To trade you need to make two transactions i.e. buy and sale So the cost of making trade is 0.5246 * 2 = 1.04% In my case th cost of making trade is 1.04% of 1000 = 10 rupees Thus, I will suffer a loss of  1005 - 1000 - 10= 5 (loss)  New investors keep in mind that they should atleast sell at more than 1%