Online Trading – How does online trading work?
India ranks second in the global list of number of internet users. After all, “Online” is the new place to be. Whether it is ordering groceries, buying furniture, paying your insurance premium or making travel plans, it can be done online these days. In fact, it is increasingly becoming the preferred mode of doing transactions. No wonder, by 2018 Indians had started consuming 1GB data daily as compared to 4GB per month earlier (Source: Nielsen India). And this is just the statistics for smartphones!
So, it comes as no surprise that online trading in India has also picked up momentum in the recent times. If you are seriously considering investing in the stock markets, then it is essential to find out about online trading.
What is Online Trading?
Online trading is the act of making buying and selling transactions for shares and other financial products through a digital or online platform. Anyone with an internet connection, trading account, bank account and sufficient funds can go for online trading.
The biggest advantage of this mode of trading is the convenience factor. You can buy or sell stocks and securities from the comfort of your home or even while on the go. Additionally, cumbersome paperwork is possible at the click of a button.
Online Trading in India
Online trading in India started in the year 2002. It has brought a paradigm shift in the trading environment. Automation of the trading process has significantly brought down the turnaround time and paperwork involved. It has streamlined the process and made it more flexible, simple and customer friendly.
Thanks to this wave of automation, the capital markets have witnessed a 1488% growth in the last decade. Mobile trading has also seen a solid jump in the recent years. Currently 10.15% of the average daily turnover on NSE is through this route. This is a growth of more than 800% in the last five years.
How does online trading work?
Majority of the stock market trading takes place on India’s two exchanges – National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). Before you can understand how online trading works, it is important to understand the various involved components. In order to start online trading, one needs to do the following:
1. Demat and Trading Account
Anyone who wants to do online stock trading in India needs to have a trading account and demat account.
What is a demat account?
A demat account is an account which holds the shares or securities in an electronic format. A trading account facilitates the transactions (buying and selling) in the stock markets. All the buy or sell orders are placed through this account. The demat account is similar to a bank account in which all the debit and credit transactions are made.
Many service providers offer a 2-in-1 account which combines the benefit of an online trading and demat account. Some banks also offer a 3-in-1 account. This adds demat and trading facility to your savings bank account.
We will elaborate more on the steps to open a demat/ trading account in the later part of the article.
So, online trading account can be used for or margin trading, delivery based trading and derivative trading. It can also be used for investing in IPOs and mutual fund. However, demat account is not mandatory for making investments in Mutual Funds.
2. Depositories
There are two depositories that are registered with the SEBI- National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). They act as the custodian for dematerialised securities. They have the accountability of safe-keeping the securities/portfolio. Depositories provide their services through Depository Participants (DPs). Banks, trading members and financial institutions registered with SEBI can act as DPs.
3. Learn the stock market terminology
Before you begin to tango, you need to know the steps. Similarly, in order to do any online trading, one needs to be familiar with common terminologies and basics. The stock market works on the basic principle of demand and supply. One should keep a tab on financial affairs, market news, etc.
How to open a demat or trading account?
1) Reach out to a broker / Depository Participant:
The first step is to find a registered stock broker. Broadly speaking, there are two kinds of brokers:
a) Full Service Brokers:
These brokers offer a wide range of services in addition to stock trading. Such as financial research, market updates, tax planning and retirement planning.
b) Discount Brokers:
These brokers provide only trading facility. Due to their no-frills services, their charges are much lower as compared to full-service brokers.
While selecting a broker one should consider the following:
i) Account Opening Charges:
This is the amount charged for the opening of the demat or trading account.
ii) Account Maintenance Charges:
This refers to the annual fees for maintaining the demat or trading account.
iii) Brokerage:
Brokers levy certain fees for processing the orders (buy /sell) placed by the investors. The commission charged varies from one broker to another. They also depend on the type of transaction such as intraday transactions, transactions involving delivery, futures and options, etc. Some also offer discounts basis the number or value of trade conducted.
iv) Technical expertise and service record:
You should not blindly select the cheapest alternative. The quality and nature of service should be the most important criteria. If a particular stock broker has an exemplary service record, the higher brokerage charges may become justifiable.
2) Complete account opening formalities:
The broker provides the trading account application form. The same needs to be filled up and submitted with the necessary KYC documents. These include:
i) PAN Card
ii) Identity Proof
iii) Address Proof
iv) Cancelled cheque (for the account that will be linked to the trading account)
v) Bank statement for the last six months (only applicable for derivative segment trading)
vi) Photographs
Documents such as Aadhar, Driver’s License, Passport, etc. are considered valid for this purpose.
In addition to the application forms, you also need to sign a Power of Attorney (PoA) in favor of the intermediary/broker. This is required for the transfer of securities (margin purposes), settlement of trades and funds from the client's account and for recovery of the amount payable to the broker/DP.
After successful verification of all the details provided, the trading account details are shared with you for future reference.
There are many online stock trading websites. However, choosing the right one can make the entire process more streamlined, easier and lucrative for investors. IndiaNivesh is a well-known financial services partner in this domain. IndiaNivesh continuously keeps on changing and adapting as per the market sentiments and evolving customer needs. State-of-the art technological tools combined with an experienced team have been delivering customised financial solutions since the last 11 years. A range of services related to broking, institutional equities, portfolio management, investment banking, private wealth and corporate advisory are offered.
Final Words
If you keep all these points in mind, online stock trading can be a non-intimidating, easy and profitable income generator. And above all, you must remember that you must think long to get the best out of the stock markets. Patience is a virtue!
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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Investment Banking - Overview, Types and All You Need to Know
Most people get awed when someone mentions that they are investment bankers. You think of a high-profile corporate professional, decked up in a smart suit making a crisp presentation to the top management. But do we really know what does an investment banker do or what is investment banking? Read on to know more.What is investment bankingInvestment banking is the arm of a bank or any other financial institution that offers financial consultancy and advisory services to entities, government or individuals. They render a wide range of services to their customers which includes:• Capital Issue ManagementIndian investment banks offer public issue management through two routes:o Fixed Price Methodo Book Building MethodThey also offer assistance to firms during IPO (Initial Public Offer), FPO (Follow on public offer), Rights issue, Preferential Issue and debt placement. • Advisory services during mergers and acquisitionsInvestment banks play a crucial role during mergers and acquisitions. They help the entities to make the right deals by checking feasibility, minimizing risk and maximizing ROI. They either represent the seller (target representation) or the buyer (acquirer representation). Some key activities in M&As include:o Establishing a fair and just value for the involved partieso Sourcing dealso Financing • Debt SyndicationInvestment banks also help companies to look for new finance opportunities and sources. This includes project finance, working capital loan, term loans, commercial borrowing, etc. • BuybacksAnother common activity performed by investment banks is to advise their clients when and how much to buy-back their shares. • Legal complianceInvestment bankers help their clients in ensuring that they adhere to all the statutory requirements and compliances as laid down by SEBI. • Corporate AdvisoryThese services are usually offered to large-scale organizations or corporate bodies. Investment banking includes doing business appraisals, developing business plans, strategic advisory, valuation, corporate restructuring, etc. These services are often tailor-made as per the needs of the clients. Investment Banking in IndiaInvestment banking in India is not a new concept. The roots of modern day investment banking can be traced back in India to the 19th century. This was the period when European banks created trading banks in the country. Investment banking in India used to be referred to as merchant banking. For many years, foreign (non-Indian) banks continued to dominate the merchant banking scene.However, in the year 1970 State Bank of India decided to venture into this domain. It created the Bureau of Merchant Banking and many national banks registered in this initiative. The first national financial institution that offered merchant banking services was ICICI Securities. Within a decade, the number of merchant banks grew beyond 30. The rapid growth in the financial industry especially commercial banks further fueled this growth in the later years. Since its inception, there have been numerous developments in the structure, role and services provided by investment banking.Association of Investment Bankers of India (AIBI)AIBI is a SEBI recognised body and acts as the nodal body of Indian investment banks. Its objective is to set in place standard practices, professional benchmarks and guidelines for rendering efficient services in the field of investment banking. Initially formed as Association of Merchant Bankers of India (AMBI), it has recently undergone a transformation phase to come in sync with the current market scenario. It was during this brand transformation that the name of the body (along with the logo) was updated to Association of Investment Bankers of India (AIBI) as investment banking’s scope is much broader than the erstwhile merchant banking. Currently, there are 59 investment banks (SEBI registered) who are members of AIBI.Some of their key activities include:• Code of ConductAIBI comes out with the Code of Conduct that needs to be followed by all members. This ensures quality, uniformity and standardisation in the investment banking services. Additionally, a Due Diligence Manual is also shared with all the participating members. • WatchdogAIBI acts as the watchdog for the Investment Banking industry in India. It ensures that all members follow ethical practices and adhere to all the legal / statutory guidelines. • Thought Leadership and central repositoryAIBI acts as the nodal point for assimilation and distribution of information related to the investment banking ecosystem. • Representation at PMACIt represents the investment banking industry at the PMAC (Primary Markets Advisory Committee) formed by SEBI. • Events, seminars and annual summitsAIBI frequently organises events and workshops on matters related to the investment banking domain. Types of investment bankingThere are different types of investing banking service providers. Such as:• Full-Service FirmsFull-service investment banks offer the whole suite of services. For instance, underwriting, Mergers and Acquisitions, merchant banking, distribution, brokerage, asset management, structured investments and research. • Boutique FirmsThese are specialist investment banks which offer niche or specific investment banking services. These are relatively newer entrants in the market and have evolved as a result of market demand by smaller entities and start-ups. • Commercial BanksSome commercial banks have also extended their scope beyond pure banking and offer some investment banking services. • Brokerage FirmsThese firms only offer trading services to their clients. They are often used by underwriting investment banks while placing issues.Choosing an investment bankChoosing the right investment bank plays a crucial role in achieving the desired results. Here are some factors that you should take into consideration.• Capabilities and credentialsProfessionals in their team and their skills, market experience and credibility. This also includes support teams such as research, information technology, etc. • ExperienceExperience with relevant services and your sector / sub-sector needs to be checked. • Size/Volume of transactionsDetails of comparable transactions (basis your requirement) completed in the last five years will help with this information. • Accessibility and transparencyLevel of transparency displayed by the investment bank in their transactions along with their day-to-day accessibility needs to be assessed. Many times, local support or presence is preferred. • Valuation MethodologyAlignment with your business’s needs and the valuation methodology of the financial partner is important. IndiaNivesh is a well-known name in the Indian financial solutions industry. It offers a wide range of services including investment banking. Their ability to offer customised solutions and connect businesses enables them to act as a professional navigator for the long-run growth of their clients. They specialise in:• raising capital (from domestic and global sources)• facilitating entry of foreign enterprises in India• globalisation of domestic entities• corporate finance activities and• support during mergers and acquisitions.For a runner, the perfect running shoes can make all the difference. Similarly, the correct investment banking partner can help you get the much needed competitive edge. With a suite of unique products and market expertise, IndiaNivesh can be that partner for you.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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How to Make Money from Dividends
Every investor has a common goal – to make money from his or her investment. There are two routes through which this can be achieved Capital Appreciation Making money from the dividend payout For capital appreciation, the fundamental is simple. Buy when low and sell when high. The difference is the profits. Most investors aggressively follow this principle and are always on the lookout for good stocks at a cheap valuation. However, there is another effective way to make money from shares which are often overlooked by investors especially the uninitiated. It is through Dividends. Read on to know more about how to make money from dividends. Dividend - Meaning A dividend is the amount of money paid to the shareholders from the earnings (including reserves) of the company. It is a reward given to you, as a shareholder for investing your money in the company. It is a way to: Return a portion of the profits to the shareholders Attract more investors Show financial strength Create more demand for their stock which can have a positive impact on the market value of the shares. There is no legal obligation for companies to issue a dividend. Newly started companies or those with a high growth rate seldom pay out dividends. This is because they need to reinvest their profits for research, growth or expansion. However, established companies offer a regular payout to reward their shareholders. When the dividend is announced, it decides a record date and all registered stockholders (as on the record date) are eligible to receive the dividend payout in proportion to the number of shares held by them. Frequency of dividend payout Usually, companies declare dividends twice in a year i.e. Interim Dividend and Final Dividend. However, this is purely at the discretion of the company and is not subject to any guidelines or rules. Types of dividend: A dividend is a proportion of retained earnings that is paid out to the stockholders. There are five types of dividend payout mechanism: 1. CashThis is the most popular and commonly used dividend type. Cash dividends are usually done through electronic transfers to the investor’s bank accounts or through cheque payments. For example, ABC Co.’s Board of Directors declared a cash dividend of Rs. 3 per share for the 2 lakh outstanding shares, to be paid on 30th Sept. Ms. A holds 2,000 shares of ABC Co. She would receive Rs 6,000 as dividend income in her bank account on the said date. 2. StockStock dividends are paid to the shareholders by giving them additional new shares of the company. This allotment is done at zero consideration. The issue of stock dividends is done on a pro-rata basis. In case the company issues additional stock (as a dividend) which is less than 1/4th of the number of existing outstanding shares, it is treated as a stock dividend. If the new issue is of a greater proportion (i.e. more than 1/4th), then it is referred to as a stock split. The fair value of the new stock issued as a dividend is calculated basis the fair market value on the date of dividend declaration. 3. ScripDividend payouts done through promissory notes are scrip dividends. At certain times, companies may have a cash crunch or insufficient earnings for them to pay out dividends. In such scenarios, they may issue scrip dividends to the shareholders. The shareholders are given a note or scrip that promises payment at a certain future date. Usually, these promissory notes come with a definite maturity date. They may or may not be interest bearing. 4. BondBond dividends and scrip dividend are similar in principle. They both indicate a dividend payout at a deferred future date. In the case of a bond dividend, the company makes a promise to pay out the dividend at a later date in the future. To that effect, it issues bonds to the shareholders instead of cash. Bonds used as a way to pay dividends always come with interest. Usually, bond dividends have a longer maturity date as compared to scrip dividends. 5. PropertySome companies pay the dividend in the form of assets (excluding cash). For instance, a company may distribute its superfluous assets or own products as dividends. This form of dividend payment is not very common in India. Making money from dividend Most investors make the cardinal mistake of taking the dividend yield as an absolute value. They feel that a yield of 2% or 3% is too less for them to make a good amount of money from dividends. However, as a prudent investor, you must keep the following points in mind: 1. Growth with timeAn established or fundamentally robust company will keep on increasing the dividend payouts with time. Also, while the dividends will increase, your purchase cost stays constant throughout the holding period. So, if you calculate the dividend yield, the numerator (annual dividend) will keep on increasing while the denominator (purchase cost) remains unchanged. In short, a higher yield in the future. Expert Tip: Making money from dividends is like a test match. You need to play consistently in the long run. You should not treat it as a 20-20 match. 2. TaxationIt is important to understand the tax liabilities for income from dividends. If the dividend is paid by an Indian company, it is exempt from tax until such income does not exceed Rs. 10 Lakhs. Dividend income above 10 Lakhs is subject to a 10% tax. However, dividends received from a foreign company is added under the category “Income from other sources” and taxed as per slab. Expert Tip: Hence, it is important to choose the right stock to get more net income in hand. Top #5 Things to consider before dividend investing Making money from dividends needs careful evaluation of several factors. These include:1. Yield Percentage:The dividend yield of the stock at the time of investing. It is important to check the yield percentage and not just the dividend per share.2. Profit Growth Rate:The growth rate of the company’s bottom and top line. The profit growth rate can be useful in projecting future dividend earnings.3. Financial Health of the Company:The overall health of the company. You should check the balance sheet to find the amount (and type) of debt. Too much debt or continuous fall in sales revenue may pose risk to dividend income in the future.4. Dividend History:Remember that paying a dividend is not an obligation. Companies are free to reduce or stop these payouts. Hence, analyse the dividend history of the company under consideration.5. Tax Rules:Current tax rules applicable to dividend income. If you feel that you are not able to decide the highest paying dividend stocks or need help in choosing the right stock for you, you can always reach out to experts like IndiaNivesh. Their in-depth understanding of the Indian markets, extensive research, and experienced team ensures that each customer can make the right choice as per their needs. They regularly come out with useful reference material which highlights the top dividend-paying stocks. IndiaNivesh offers financial solutions in numerous domains – Mutual Funds, Broking, IPOs, Insurance, Derivatives, PMS, Investment Banking, Wealth Management, and Strategic Investments. Get in touch with the experts today! Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing
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