How trading takes place and what is the process of trading?
The normal course of online trading in the Indian market context is placed below:
Step 1. Investor / trader decides to trade
Step 2. Places order with a broker to buy / sell the required quantity of respective securities
Step 3. Best priced order matches based on price-time priority
Step 4. Order execution is electronically communicated to the broker’s terminal
Step 5. Trade confirmation slip issued to the investor / trader by the broker
Step 6. Within 24 hours of trade execution, contract note is issued to the investor / trader by the broker
Step 7 Pay-in of funds and securities before T+2 day
Step 8. Pay-out of funds and securities on T+2 day
In case of short or bad delivery of funds / securities, the exchange orders for an auction to settle the delivery. If the shares could not be bought in the auction, the transaction is closed out as per SEBI guidelines.
How do I place my orders with the broker or sub broker?
You can either go to the broker’s / sub broker’s office or place an order over the phone / internet or as defined in the Model Agreement given above.
How do I know whether my order is placed?
The Stock Exchanges assign a Unique Order Code Number to each transaction, which is intimated by broker to his client and once the order is executed, this order code number is printed on the contract note. The broker member has also to maintain the record of time when the client has placed order and reflect the same in the contract note along with the time of execution of the order.
What documents should be obtained from broker on execution of trade?
You have to ensure receipt of the following documents for any trade executed on the Exchange:
a. Contract note in Form A to be given within stipulated time.
b.In the case of electronic issuance of contract notes by the brokers, the clients shall ensure that the same is digitally signed and in case of inability to view the same, shall communicate the same to the broker, upon which the broker shall ensure that the physical contract note reaches the client within the stipulated time.
It is the contract note that gives rise to contractual rights and obligations of parties of the trade. Hence, you should insist on contract note from stock broker.
What details are required to be mentioned on the Contract note issued by the Stock Broker?
A broker has to issue a contract note to clients for all transactions in the form specified by the stock exchange. The contract note inter-alia should have following:
- Name, address and SEBI Registration number of the Member broker.
- Name of partner /proprietor /Authorised Signatory.
- Dealing Office Address/Tel No/Fax no, Code number of the member given by the Exchange.
- Unique Identification Number
- Contract number, date of issue of contract note, settlement number and time period for settlement.
- Constituent (Client) name/Code Number.
- Order number and order time corresponding to the trades.
- Trade number and Trade time.
- Quantity and Kind of Security brought/sold by the client.
- Brokerage and Purchase /Sale rate are given separately.
- Service tax rates and any other charges levied by the broker.
- Securities Transaction Tax (STT) as applicable.
- Appropriate stamps have to be affixed on the original contract note or it is mentioned that the consolidated stamp duty is paid.
- Signature of the Stock broker/Authorized Signatory.
Contract note provides for the recourse to the system of arbitrators for settlement of disputes arising out of transactions. Only the broker can issue contract notes.
What is the maximum brokerage that a broker can charge?
The maximum brokerage that can be charged by a broker has been specified in the Stock Exchange Regulations and hence, it may differ from across various exchanges. As per the BSE & NSE Bye Laws, a broker cannot charge more than 2.5% brokerage from his clients.
What are the relevant Rules and Regulations and where can I find them?
You can browse through the “Legal Framework” section on the SEBI website http://www.sebi.gov.in for complete information relating to acts, rules, regulations, circulars, and guidelines relating to securities market.
What are the charges that can be levied on the investor by a stock broker?
The trading member can charge:
- Brokerage charged by member broker.
- Penalties arising on specific default on behalf of client (investor)
- Service tax as stipulated.
- Securities Transaction Tax (STT) as applicable.
The brokerage, service tax and STT are indicated separately in the contract note.
What is STT?
Securities Transaction Tax (STT) is a tax being levied on all transactions done on the stock exchanges at rates prescribed by the Central Government from time to time. Pursuant to the enactment of the Finance (No.2) Act, 2004, the Government of India notified the Securities Transaction Tax Rules, 2004 and STT came into effect fromOctober 1, 2004.
What is an Account Period Settlement?
An account period settlement is a settlement where the trades pertaining to a period stretching over more than one day are settled. For example, trades for the period Monday to Friday are settled together. The obligations for the account period are settled on a net basis. Account period settlement has been discontinued since January 1, 2002, pursuant to SEBI directives.
What is a Rolling Settlement?
In a Rolling Settlement, trades executed during the day are settled based on the net obligations for the day.
Presently the trades pertaining to the rolling settlement are settled on a T+2 day basis where T stands for the trade day. Hence, trades executed on a Monday are typically settled on the following Wednesday (considering 2 working days from the trade day).
The funds and securities pay-in and pay-out are carried out on T+2 day.
In case of purchase of shares, when do I make payment to the broker?
The payment for the shares purchased is required to be done prior to the pay in date for the relevant settlement or as otherwise provided in the Rules and Regulations of the Exchange.
In case of sale of shares, when should the shares be given to the broker?
The delivery of shares has to be done prior to the pay in date for the relevant settlement or as otherwise provided in the Rules and Regulations of the Exchange and agreed with the broker/sub broker in writing.
How long it takes to receive my money for a sale transaction and my shares for a buy transaction?
Brokers were required to make payment or give delivery within two working days of the pay – out day. However, as settlement cycle has been reduced fromT+3 rolling settlement to T+2 w.e.f. April 01, 2003, the pay out of funds and securities to the clients by the broker will be within 24 hours of the payout.
Is there any provision where I can get faster delivery of shares in my account?
The investors/clients can get direct delivery of shares in their beneficial owner accounts. To avail this facility, you have to give details of your beneficial owner account and the DP-ID of your DP to your broker along with the Standing Instructions for ‘Delivery-In’ to your Depository Participant for accepting shares in your beneficial owner account. Given these details, the Clearing Corporation/Clearing House shall send pay out instructions to the depositories so that you receive pay out of securities directly into your beneficial owner account.
What is an Auction?
The Exchange purchases the requisite quantity in the Auction Market and gives them to the buying trading member.The shortages are met through auction process and the difference in price indicated in contract note and price received through auction is paid by member to the Exchange, which is then liable to be recovered from the client.
What happens if the shares are not bought in the auction?
If the shares could not be bought in the auction i.e. if shares are not offered for sale in the auction, the transactions are closed out as per SEBI guidelines.
The guidelines stipulate that “the close out Price will be the highest price recorded in that scrip on the exchange in the settlement in which the concerned contract was entered into and up to the date of auction/close out OR 20% above the official closing price on the exchange on the day on which auction offers are called for (and in the event of there being no such closing price on that day, then the official closing price on the immediately preceding trading day on which there was an official closing price), whichever is higher.
Since, in the rolling settlement the auction and the close out takes place during trading hours, the reference price in the rolling settlement for close out procedures would be taken as the previous day’s closing price.
What is the pay-in day and pay- out day?
Pay in day is the day when the brokers shall make payment or delivery of securities to the exchange. Pay out day is the day when the exchange makes payment or delivery of securities to the broker. Settlement cycle is on T+2 rolling settlement basis w.e.f. April 01, 2003. The exchanges have to ensure that the pay out of funds and securities to the clients is done by the broker within 24 hours of the payout. The Exchanges will have to issue press release immediately after pay out.
What is Direct Market Access (DMA)?
Direct Market Access (DMA) is a facility which allows brokers to offer clients direct access to the exchange trading system through the broker’s infrastructure without manual intervention by the broker. Some of the advantages offered by DMA are direct control of clients over orders, faster execution of client orders, reduced risk of errors associated with manual order entry, greater transparency, increased liquidity, lower impact costs for large orders, better audit trails and better use of hedging and arbitrage opportunities through the use of decision support tools / algorithms for trading. Presently, DMA facility is available for institutional investors.
What is meant by Unique Client Code?
In order to facilitate maintaining database of their clients and to strengthen the know your client (KYC) norms; all brokers have been mandated to use unique client code linked to the PAN details of the respective client which will act as an exclusive identification for the client.
What is Margin Trading Facility?
Margin Trading is trading with borrowed funds/securities. It is essentially a leveraging mechanism which enables investors to take exposure in the market over and above what is possible with their own resources. SEBI has been prescribing eligibility conditions and procedural details for allowing the Margin Trading Facility from time to time.
Corporate brokers with net worth of at least Rs.3 crore are eligible for providing Margin trading facility to their clients subject to their entering into an agreement to that effect. Before providing margin trading facility to a client, the member and the client have been mandated to sign an agreement for this purpose in the format specified by SEBI.It has also been specified that the client shall not avail the facility from more than one broker at any time.
The facility of margin trading is available for Group 1 securities and those securities which are offered in the initial public offers and meet the conditions for inclusion in the derivatives segment of the stock exchanges.
For providing the margin trading facility, a broker may use his own funds or borrow from scheduled commercial banks or NBFCs regulated by the RBI. A broker is not allowed to borrow funds from any other source.
The “total exposure” of the broker towards the margin trading facility should not exceed the borrowed funds and 50 per cent of his “net worth”. While providing the margin trading facility, the broker has to ensure that the exposure to a single client does not exceed 10 per cent of the “total exposure” of the broker.
Initial margin has been prescribed as 50% and the maintenance margin has been prescribed as 40%.
In addition, a broker has to disclose to the stock exchange details on gross exposure including name of the client, unique identification number under the SEBI (Central Database of Market Participants) Regulations, 2003, and name of the scrip.
If the broker has borrowed funds for the purpose of providing margin trading facility, the name of the lender and amount borrowed should be disclosed latest by the next day.
The stock exchange, in turn, has to disclose the scrip-wise gross outstanding in margin accounts with all brokers to the market. Such disclosure regarding margin-trading done on any day shall be made available after the trading hours on the following day.
The arbitration mechanism of the exchange would not be available for settlement of disputes, if any, between the client and broker, arising out of the margin trading facility. However, all transactions done on the exchange, whether normal or through margin trading facility, shall be covered under the arbitration mechanism of the exchange
What is day trading?
Day trading refers to buying and selling of securities within the same trading day such that all positions will be closed before the market close of the trading day. In the Indian securities market only retail investors are allowed to day trade.
What are the various accounts an investor should have for trading in securities market?
Beneficial owner Account (B.O. account) / Demat Account: It is an account opened with a depository participant in the name of client for the purpose of holding and transferring securities.
Trading Account: An account which is opened by the broker in the name of the respective investor for the maintenance of transactions executed while buying and selling of securities.
Client Account / Bank Account: A bank account which is in the name of the respective client and is used for debiting or crediting money for trading in the securities market.
What are the main things an investor should be aware of while dealing with a broker/sub-broker?
Good understanding of investment opportunities alone may not help the investor in the securities market to trade. It is also important that the investor understands the process of investing, such as finding an appropriate broker, handling buying and selling of securities and maintaining records.
Before choosing a broker/sub-broker the investor should be aware of the following things:-
Ø From where the broker/sub-broker has learnt the business?
Ø How long has he been serving the securities industry?
Ø Whether he has eligible qualifications as a broker?
Ø How many clients does he serve?
Ø What fees and expenses does he charge?
What are the major rights and obligations of an investor?
a) Before entering into a contract with the broker, ensure that he is registered with SEBI.
b) Satisfy yourself about the credentials of the broker by asking for information/documents supporting his claims.
c) Keep a documentary proof of having made deposit of money or securities with the broker.
d) Before activating your trading account, obtain clear idea from your broker about all brokerage, commissions, fees and other charges which will be levied on your trades.
e) Furnish details in full as are required by the broker as required in “know your client” (KYC) norms.
f) Ensure that a contract note is issued by the broker which contains complete records of every transaction within 24hrs of the execution of the contract.
g) In case pay-out of money and / or securities is not received on the next working day after date of pay-out, follow up with the concerned broker for its release. If it is not released within five working days, ensure to lodge a complaint immediately with the Investors’ Grievance Cell of the exchange.
h) Ensure to receive a complete ‘Statement of Accounts’ for both funds and securities settlement every quarter.
What are the major obligations and responsibilities of a broker?
a) Entering into an agreement with his client or with sub broker and client
b) Maintenance of separate books of accounts and records for clients
c) Maintenance of money of clients in a separate account and their own money in a separate account.
d) Issue of daily statement of collateral utilization to clients
e) Appointment of compliance officer
f) Issue of contract note to his client within 24hrs of the execution of the contract.
g) Delivery / Payment to be made to the client within 24 hrs of pay–out.
h) Other duties as specified in the SEBI (Stock Brokers and Sub-Brokers) Rules, 1992.
What is Trade for Trade Segment?
In a Trade for Trade segment, settlement of trades is done on the basis of gross obligations for the day. No netting is allowed and every trade is being settled separately
Are all the investors mandated to comply with PAN requirement?
Yes. With effect from July 02, 2007, PAN has been made mandatory for all the investors participating in the securities market. In order to strengthen the Know Your Client (KYC) norms and identify every participant in the securities market with their respective PAN to ensure sound audit trail of all the transactions, SEBI has mandated PAN as the sole identification number for all persons transacting in the securities market, irrespective of the amount of transaction.
With whom should the investor file his complaint against an intermediary?
In case an investor feels that his issue/problem/grievance is not being sorted out by concerned intermediary then he may take up the matter with the immediate/next higher level authority/SRO for the concerned intermediary. If the investor is not satisfied with the resolution of his complaint then he can escalate the matter to SEBI. Example: for complaint against sub-broker/broker you may approach stock exchange. For complaints against DPs, you may approach Depository.
In order to expedite the process of redressel of complaints and to make the process of lodging a complaint easier for the complainants, all SEBI registered intermediaries have been mandated to designate an e-mail ID of the grievance redressel division/compliance officer exclusively for the purpose of registering complaints. The intermediaries have also been advised to display the email ID and other relevant details prominently on their websites.
Source : SEBI.gov.in