All you wanted to know before you start investing in Stock Markets

Starting Investment in Stock Markets

It was time to for yet another skype session. After understanding the need for companies to go public it was time to discuss; who, when and how can one invest in the stock market. “Can I start investing in stock markets, it’s still some months before I turn 18”, asked Apurva.  Ideally the law requires you to be 18 years old to start investing in the stock market on your own, but there is a provision under which your parents can open account for you acting as a custodian. How does a share look like? Is it similar to the currency we carry for monetary transaction? Where can one open account for investing stocks, if one already has a savings account can he store his shares in the same account?  Apurva had some many questions in her mind and we decided to tackle all the questions one by one.

Let us start with the question “how does a share look like”. With the advent of technology, it is no longer needed to hold a share in a physical format. Before the technology took over, share of a company used to be in the form of physical form i.e. physical certificate. But there had been many scams where in people involved in the scam came up with fake physical certificates and started trading them in the stock market. This created fake demand for the shares and resulted in the value of these shares which were not in synch with their business fundamentals. No one new why the price of those share kept rising before the scam unfolded and it was decided to convert these share certificate in electronic format. Also since the share certificates were in the physical format there was possibility of them getting lost or getting spoiled with time. Converting these certificate to electronic format resolved all these issues and made it possible for the regulators of the share market to monitor them centrally and avoid any activity that would possibility manipulate the stock market in an illegal manner. The electronic format of the share is also called as dematerialized format. Now we will come to the next point as to where can one store the dematerialized format of the shares. Like you need to have savings account with the bank, we need to have “Demat” account to store the electronic shares. There are 2 central depositories that offer this facility of Demat account. National Securities Depository Limited (NSDL) and the other is the Central Depository Service (India) Limited (CDSL). 

It is difficult for these two depositories to provide the service of depositories in the form of a Demat Account centrally all across India. Hence to facilitate this, these depositories have their agents known as the depository participants, popularly known as “DPs”. These depositary participants need to register with the depositories. The depositories charge the DPs and the DPs intern charge the customers. Apart from one time account opening charge, the DPs can charge only for debit transactions. I.e. a DP can only charge for share transaction in which you buy a share, it cannot charge you for holding a share or transaction when you sell the share. The fee for a debit transaction is based independent of the number of shares traded in that transactions. E.g. irrespective of you sell 1 share or 1000 shares of a company A, the charge will be considered as a single charge since the charge for the entire transaction for the shares of company A. These DPs can be Banks, NBFCs (Non-Banking Financial Companies) or a Broker. Let us try and understand functionalities of a Broker.

Apart from providing the DP service in the form a Demat account, brokers provide service of trading account. Remember that Demat account only allows you to keep the share, acting as a depository. If you want to sell or buy a share you need to have a trading account provided by the broker. The regulator of share market, SEBI (Security Exchange Board of India) allows individual to trade in the share market via brokers only. The brokers need to register with the stock exchanges in order to facilitate stock trading. In India, BSE and NSE are most popular stock exchanges. It’s for a company to decide whether it wants to get listed on NSE or BSE or Both. The price of share on the two exchanges will almost be same but may not be exactly same. These exchanges charge brokers for their service and the brokers in turn charge the customer for trading through the trading account. The charge that brokers charge is known as “Brokerage”. Different brokers can charge different brokerage. Unlike the Demat charges which are based on the per debit transactions, brokerage depends upon the size of the total transaction. The brokerage is a two way affair which means that you will be charged for both Debit and Credit transactions (i.e. Brokerage will be charge both at the time of selling and buying the shares.). Also the brokerage for selling/buying one share will be lesser than that of buying/selling 1000 shares. Apart from the account opening charges, brokers can charge an Annual Maintenance fees for a trading account.

When you buy a share, broker has the responsibility of debiting money from the savings account linked to a trading account and providing it to exchange and putting the shares into your debit account facilitated by the DP. Ideally one can opt for Dmat and trading account from different entity providing the service. And the savings account linked can be a different entity all together. I.e. you could have trading account of ICICI (icicidirect), Demat account from HDFC (HDFC securities) and savings account of SBI. But ideally you would want to have these opened with the single entity. This is because doing this would save some charges for you. Broker/DP and banking from same entity can offer you discount on initial opening charges/maintenance charges, transaction charges. The role of the exchange in this entire transaction is of a Match Maker i.e. matching a buyer’s requirement with that of a seller.

It takes two days for a transaction to be completed. Which means it takes two days for shares to be credited in the account in case you bought the shares or money to be deposited into your account in case you sold shares. We will discuss what happens in these two days some other day. We ended a skype call on this note.