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 Chapter 6: Getting Started
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 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.

Choosing a broker

There are more than 8,000 SEBI registered brokers and sub-brokers, all providing a similar service, i.e., buying and selling securities. Given this large number, it would be very difficult for you to find the right broker. You must, hence, look for the following factors before selecting a broker:
  1. Reputation: Broking is a business that requires a low capital base. An individual/corporate/institution can acquire membership as a broker of National Stock Exchange (NSE) with a net worth of 100 lakhs. No wonder, the number of brokers has grown manifold. Hence, it is critical to deal with a broker who has a good reputation. This is broadly reflected in the past record and the credibility that he enjoys in the market. A reputed broker protects the investor from default risk, fraud and other financial risks. Several institutional brokers have an impeccable track record. Some of these are,’ ICICI Securities’,’ HDFC Securities’, ‘Motilal Oswal Securities’ etc.
  2. Flexibility: The stock exchanges follow the T+2 settlement schedule. This means that settlement occurs two days after the transaction. Hence, if you decide to buy shares on a given day, you must submit the cheque to the broker well in advance, so that he can deposit the amount with the exchange. Some of the brokers do provide flexibility in terms of payments made, while others ask for an upfront payment of funds. Brokers also allow margin based trades and square off of positions in intra-day transactions. Ideally, you must check with the broker as to what are the facilities available.
  3. Broking rates: As per SEBI guidelines, a broker can charge a maximum of 2.5 per cent of the consideration as brokerage. The standard rate charged by most, ranges from 0.50 to 0.75 per cent. Brokerage inflates the cost of purchase and reduces the realisation from sale of securities. You must therefore check the rates charged. Sometimes, a minimum transaction charge is attached irrespective of the value. Brokers also provide competitive rates to the high value investors and to regular traders.
  4. Different modes of transactions: An investor can buy or sell securities, either by phone, by giving an order through the internet or by making personal visits. The broker identifies transaction done on telephone by an alphanumeric code allocated to the investor. Web based transactions are conducted by using a user id and password on the broker’s website. This is basically a unique identification for each client and also a security mechanism.
  5. Service Quality: Service quality of the broker is another important determinant. For instance, how fast a broker can transact for his clients reflects his service standards. Since markets operate on a real time basis, at times, small delays result in financial losses. Another aspect of quality is transfer of security by the broker to the client account, settlement of funds, timely dispatch of contract notes, providing transaction ledger to the clients etc.
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Investing Basics
Financial planning
Investment risk management
Why Equities are a Must
Equity Basics
Getting started

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.

There are more than 250 DPs registered with two depositories in India, which are NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). Once again, due to this high number, you must filter the right choice before you open a demat account. There are several kinds of DPs operating in the market. They can be broadly classified as follows:

  1. Banks working as DPs such as HDFC Bank, ICICI Bank, UTI Bank and several PSU Banks.
  2. Custodians such as Stock Holding Corporation of India Ltd., Infrastructure Leasing and Financial Services (IL & FS)
  3. Brokers acting as DPs like ShareKhan, Motilal Oswal, Anand Rathi etc.
  4. Others would include Indiabulls and Foreign Banks

How to select a DP of your choice: You need to keep the following in mind while selecting a DP:

  1. Reputation: Three leading DPs in India in terms of number of demat accounts are ICICI Bank, Stock Holding Corporation of India Ltd. and HDFC Bank. Though there is no method available to grade DPs, certain past events give a fair idea of their standing. When SEBI carried out inspections in the IPO scam in 2006, some DPs were found to be following unfair practices and consequently penalties were levied on them. Such events may be used as benchmarks for reputation. Also, you should check whether the DP follows the guidelines imposed by the depository while opening your demat account. The web page of NSDL and CDSL provide FAQs for investors in this regard.
  2. Cost: With effect from 1st April 2007, SEBI has made it mandatory for DPs to display the charges that they levy on investors on the SEBI website. This is updated twice a year so that you can analyse the charges of different DPs. Some standard charges are as follows:
    1. Annual Maintenance Charges
    2. Charges for debit in demat account
    3. Demat and remat charges
    4. Charges for pledge of securities
    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 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.
  3. 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.

Need for a banking account: Transactions involving shares require movement of money in and out of your account. Hence, bank accounts are mandatory along with broking and demat accounts. You may use your savings account for purchase and sale of shares by notifying the bank account details in your demat and broking account.

Three-in-One demat account: Some brokers and banks offer a ’Three In One’ demat account, where you open a demat, broking and bank account with the same entity, in case of a bank DP. Elsewhere, if the DP is a broker, an existing bank account can be used for the purpose of a ’ Three In One’ account. This ensures easy transfer of funds. However, in some cases the brokers insist on opening a bank account with a particular bank as they often have tie ups with that bank. These accounts or tie ups are beneficial as they provide a one stop solution to you, thereby saving your time and unnecessary paper work. This has also proven to be cost effective. E-trading platforms are also available in most cases where, ‘Three in One account’ facilities are available.

Requirements for opening a demat account: The following documents are required to open a demat account:
  1. Proof of residence (NSDL and CDSL provide a list of acceptable documents as POR which include electricity bill, phone bill, ration card, driving licence etc.)
  2. Proof of identity (PAN card is mandatory)
  3. Bank account details (A cancelled cheque for capturing MICR)
  4. Nominee details

Bank account details must get properly captured in a demat account as benefits like dividend and interest are directly credited in the bank account. Also, when you make an application for an IPO, you receive a direct credit in your account to the extent of shares not allotted.

Requirements for opening a broking account: The following documents are essential to open a broking account:
  1. Proof of residence (A list of acceptable documents provided)
  2. Proof of identity (Since PAN is must, it is used as POI)
  3. Bank account details (cancelled cheque for direct debits and credits)

Starting investments: Once you are through with this paper work, you are ready to start investing. Buying and selling shares on the market occurs from 9: 55 a.m. to 3:30 p.m. on all working days. Stock exchanges don’t work on Saturdays, Sundays and notified holidays.

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