Month: February 2022

Are Forex Trading Platforms Illegal in India?

Posted on by Aditya Paleri

Currency is a widely traded commodity across the world. It is more commonly known as foreign exchange trading (forex), the trading of forex is generally done on foreign exchange markets. Forex trading usually takes place over a foreign exchange trading platform, where an individual trader places a bet on the strength and movement of a certain currency against their domestic currency.

Where forex trading doesn’t involve an intermediary, that is it takes place between the trader and the platform, these kind of trades are referred to as binary transactions. 

Legality of Forex trading in India

While foreign exchange trading platforms, as well as directly trading in the foreign exchange market are banned in India, currencies can still be traded via the stock exchange. As per the rules of the Foreign Exchange Management Act (FEMA) binary trading is prohibited in India. While the trade of foreign currencies is allowed in India, it comes with some restrictions.

For example, the base currency which is being traded upon has to be Indian Rupee (INR). There are only four currencies which can be traded along with INR. These are the US Dollar (USD), Euro (EUR), Great Britain Pound (GBP), and Japanese Yen (JPY).

These are the steps Indian traders can take to trade in currencies.

Forex Trading in India – The process

In order to successfully start your journey of trading in the forex market is to register and open a currency trading account with a broker with a good international reach, as the market operates across locations like New York, London, Tokyo and Singapore.

The following are the steps to opening a currency trading account:

  • Open a Trading Account: Open a new currency trading account with a broker who has a good and proven reputation in the foreign exchange market.
  • Complete the KYC: To have a functional trading account, it is essential that the Know your customer (KYC) process is completed. This would require you to submit your ID proof, address proof, PAN details, etc.
  • Margin Requirement: You will be required to have a minimum margin in your account before you can commence trading. The broker will inform you about the margin amount you will require in your account, so that you can commence trading at the earliest.
  • Access to login credentials: The final step once your account has been opened will be for the broker to provide you with your login details. 

Once you have commenced trading in forex, like any other security or commodity, it is essential to take informed and calculated decisions.

Pros of Forex Trading 

The main attraction to forex trading is the ease of investment and the returns it yields. These are some of the     advantages of forex trading:

  • Leverage: Leverage is a trading mechanism which allows traders to increase their exposure to the market, by allowing them to pay less than the full amount of the investment. 
  • High Liquidity: Another advantage of forex trading is that it has a higher level of liquidity, as compared to other trading opportunities. Traders can easily liquidate their positions. A higher liquidity also generally prevents the risk of major change in price.
  • High Volatility: In Spite of forex being a risky trading option,high volatility can help experienced traders make good profits.
  • Decentralized Market: As the forex markets are decentralized, they are less likely to be affected by price manipulations, as compared to stock markets, where insider information can result in major fluctuations. 
  • Minimum Capital Requirement: Unlike other investment and trading options, where a huge starting capital is required, forex trading requires a relatively low starting capital.
  • Demo Accounts: Most forex trading platforms allow traders to trade with demo money initially, until they are able to understand the market movements.

Forex trading also comes with a few cons:

  • High Leverage Risk: Leverage can act as a double edged sword. While it allows its traders a wide market exposure, it also leads to higher levels of losses. If a trader is relatively inexperienced in the forex world, they can be looking at major losses.
  • Uncertainty: Unlike the stock and equity market, the forex trading market is heavily reliant on global cues, geopolitical, and socio-economic factors. Therefore a trader can never be completely certain of a change in price. There is always a bit of uncertainty present.

Tips for Forex Trading   

In case you are new to the world of forex trading, or trading altogether, these are some of the tips which can be of help to you:

  • Through the research of the market

    Every market where trading of securities, commodities or forex takes place, are most likely to be affected by a wide range of factors, both local as well as global. It is necessary to have a wide range of data regarding market trends, and historical performances of the currencies against each other, and all factors which influence the rise and drop in value of the currency. Doing thorough research on all of this before commencing investment in the foreign exchange market will prove to be a powerful tool in your arsenal.

  • Assess the performance of research Strategies

    You will need to conduct an in-depth and thorough research to analyze and assess the various investment and trading strategies which are available which have yielded higher returns in currency trading. It would be additionally beneficial if you compare the different strategies, and formulate your own personal and effective strategy, which aligns well with your requirements and goals. 

  • Keep the currencies you trade constant

    It is always advisable to trade with one to two pairs of currency, so that you can ensure that you are diverting your interests. Keeping  a constant focus on your asset while trading is the first very essential lesson that a trader must learn. Irrespective of the instrument. For example, if you are trading with Indian National Rupee (INR) and European Euro (EUR), stick to this combination for a longer period of time, than changing to US Dollar (USD), Great Britain Pound (GBP) or Japanese Yen (JPY). As this improves your consistency in earning,, and will help you learn about their market conditions.

  • Be Aware of your Goals

    Before you can commence your investing journey, it is extremely important that you identify what you aim to achieve from trading and investing. You need to set goals for yourself. Goals could mean anything from short term goals, like a family vacation, or paying off a mortgage or loan, to long term goals like, wealth creation, secondary source of income, replacing your primary source of income, children’s school or college fund, their marriage, or even your retirement. Based on the timeline you have given yourself to achieve these goals, you must choose an appropriate investing / trading strategy, which is best suited to achieving the aforementioned goals. For instance you can adopt a more aggressive approach for  short term goals, while your approach to long term goals can be relaxed.

  • Set your own limits

    While formulating your strategy, it is advisable to identify and mark out in advance at which point you would be comfortable in the trade. Knowing when to take an entry and exit from a trade will allow you to be in control, and will help you understand the market fluctuations. This will allow you to achieve your goals easily.

While trading in foreign exchange, these points can act as a guide, which if followed well, may help in your understanding of forex trade, and also help you in achieving your goals, in an efficient manner.

Understanding and being aware of the instrument you are trading is important as it will help you make sense of the market conditions and equip you to understand the fluctuations in currency. 

NSDL vs CDSL – The Showdown

Posted on by Aditya Paleri

If you’ve already opened a demat account or invested in mutual funds then at some point at the end of every month, you would receive an email with the terms “NSDL” or “CDSL” mentioned in the subject line or in the body which shows a summary of your holdings in the stock market.

When investing in the Indian markets, it’s important that you should know about the depositories. There are two primary depositories in India: NSDL which is an abbreviation for National Securities Depositories Limited and CDSL is Central Depositories Securities Limited. Both depositories are government-registered and hold shares electronically. Since we have two major stock exchanges that are the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE), the NSDL and CDSL serve as depositories for these exchanges. The NSDL is a depository for the NSE and the CDSL is a depository for the BSE.

And while the NSDL and CDSL might share the same function of storing securities in dematerialized form, they are different from each other. And what’s the difference? Let’s find out.

How do Depositories work?

Stock trading is a great way to invest in the markets, but if you want to trade in a stock market, you need a demat account first. A Demat account is a depository account that stores stocks and shares, letting you buy and sell them whenever you want. So, what’s the relationship between your Demat account and these depositories? Well, when you buy shares online, they’re held in a Demat account, which is just an intermediary. The real holders of your shares are CDSL and NSDL. 

The two depositories are the same as banks in the sense that you have an account for cash and one for fixed deposits. Individual investors can put their cash in a savings account with a bank, which is the same as holding shares with the depositories. 

Another task that depositories perform is the distribution of dividends to shareholders. Companies need to know who their shareholders are and depositories come in handy for keeping track. Previously, when you sold or bought shares from someone else, it was a much more complicated process. You would have to transfer the share certificates to the other account. Now, thanks to dematerialization, it is just an account transfer of your shares between two Demat accounts.

Understanding NSDL

NSDL is the oldest and largest depository in the country. It was set up in 1996 with the objective of facilitating the fast transfer of securities and was the first depository to start trading services in electronic format. This helped save time that otherwise would have taken had the traditional method of exchanging tangible certificates been followed. 

As per the data provided by SEBI, the NDSL has more than ~1.9cr active investors with more than ~30,600 depository participants service centres across 2000 cities in India. It keeps the following securities in dematerialised form

  • Bonds
  • Stocks
  • Debentures
  • Mutual Funds
  • Commercial Papers

The various services offered by the NDSL can be listed below

  • Dematerialization and rematerialisation of securities
  • Transfer between depositories
  • Off-market transfer
  • Collateral and mortgages of securities
  • Lending of securities

Understanding CDSL 

The second-largest depository in India was started in Mumbai. The CDSL is promoted by the  Bombay Stock Exchange and has shareholders such as HDFC Bank, Standard Chartered Bank, and Canara Bank. This depository holds securities in two formats: dematerialized (or un-certificated) and certificated. 

In the new world of trading, electronic formats are the norm and CDSL’s primary focus is to provide safe, useful, and secure depository services. The company began its operations in 1999 after receiving clearance from the Securities and Exchange Board of India (SEBI). Similar to NSDL, it keeps the following securities in dematerialised form

  • Bonds
  • Stocks
  • Debentures
  • Mutual Funds
  • Commercial Papers

The various services offered by the CDSL can be listed below

  • Dematerialization and rematerialisation of securities
  • Transfer between depositories
  • Off-market transfer
  • Collateral and mortgages of securities
  • Lending of securities

As per the data from SEBI, the CDSL has more than ~2cr active customers and more than ~20,000 depository participant service centres across the country.

How are the CDSL and NSDL different from each other? 

Instead of explaining the nuanced differences between the National Securities Depository Limited and the Central Depository Services Private Limited, we’ll just say that they’re very similar. Both offer similar services and work in the same way. Investors can avail themselves of these services through a depository participant. 

However, there are subtle differences between the two and have compiled a list of small differences between the two depositories which are mentioned below:

  • A Demat account with a DP registered at either NSDL or CDSL will work the same way. Both are approved by the government and offer similar features.
  • The Demat account number is a significant identifier for your securities. You’ll find that NSDL Demat accounts have an “IN” and 14 numeric digits, while CDSL Demat accounts have 16 numeric digits.
  • The Central Depository Services India Ltd. (CDSL) has approximately 599 Depository Participants (DPs) registered with them, while the National Securities Depository Limited (NSDL) has approximately 278 DPs registered on its system.
  • The  two depositories that the markets they operate in is a differentiating factor. NSDL operates on the National Stock Exchange (NSE) while CDSL operates on the Bombay Stock Exchange (BSE).
  • Industry experts agree that an investor can take advantage of having Demat accounts linked to any one of the depositories.
  • The NSDL has more than ~278 depository participants registered while the CDSL has more than ~600 depository participants registered. TradeSmart is one such depository participant that has registered with the depository.

The differences between the two depositories can be summarized in the table below

Differentiating Factor NSDL CDSL
Full Form National Securities Depository Ltd Central Depository Services Ltd
Promoter Exchange National Stock Exchange (NSE) Bombay Stock Exchange (BSE)
Established 1996 1999
Demat account format 16 digit alphanumeric number. Account number begins with “IN” 16 digit complete numerical number
No.of account holders ~1.9cr+ ~2cr+
No. of service centres ~30.600+ ~20,000+

What are the Services Offered by NSDL and CDSL? 

 If you compare the NSDL and CDSL, their similarities outweigh their differences. They have different sponsors and different account formats, but no difference in function or strategy. As a consumer, you can use the services of both depositories through a depository participant. 

Key services offered by NSDL and CDSL are as follows: 

  • Nomination/transmission
  •  Account opening
  •  Account statement  
  • Share market transfers and off-market transfers 
  • Distribution of non-cash corporate actions 
  • Maintenance of Demat accounts 
  • Re-materialisation and dematerialization 
  • Trade settlement

NSDL or CDSL: The better choice? 

When it comes to capital market securities, NSDL and CDSL are not any different. Their functioning strategy is the same and they are both governed by SEBI. The only difference between them is their promoters, establishment years, and account numbers.  

The choice of which depository to use is a complicated decision. If you observe the above differences then you would notice that there is no material difference between the two or something that stands out which will benefit the trader. And in this case, the trader is not involved at all in the selection of the depositories. There is no answer on which one is better, CDSL or NSDL. A DP can choose either depository and there is no reason given for the decision, nor do they see any better choice in their chosen one. There might be a difference in the charges levied by these depositories but that is mostly between the DP and depository and not the trader.

Conclusion 

Now that you’ve gotten all the information about CDSL and NSDL depositories, you can start investing wisely. Choose a trusted stockbroker with cutting-edge trading platforms like TradeSmart for your Demat account and trading account. Look for features like a free online Demat account, no annual maintenance charge, and an excellent customer service team.

Stock Market Basics – All you need to know

Posted on by Aditya Paleri

At the core of all business is money. In the case of a manufacturing unit, inputs require money to buy raw material which after sale of those goods is again converted back to money. Raw material and finished goods may change, but the common theme is money. 

The difference between production cost and sales is called profit. This is the earned income for a company after selling the goods and services. At times, the profitable income earned through sales wouldn’t be enough to meet the company’s daily working capital needs. 

In case, if the company plans to expand their businesses across places, depending solely on profits doesn’t take them anywhere. As the company requires additional money other than profits, they invite the public to invest in the company in return for a share of their earnings. After scrutinizing the overall performance of the business and other related aspects, interested people put their money into the company. In lieu of the investment, the company offers them shares. 

Now, what is a share? Let’s consider a company as a big round fluffy cake. There are 10 people who are interested in investing in the company. So, the founders of the company divided the cake into 10 pieces. As per this example, each cake piece is termed as a share. This is just for the sake of your understanding.

All those who buy the shares of the company become the owners of that particular company. To put this in simple words, a share is a part of the company’s equity ownership. People who buy the shares of the company become equity shareholders. These people also become the joint owners of the company and are entitled to voting rights.

When a person claims that he or she has invested in the company, it means they have bought the shares of that company. He/she is now the shareholder of that company. On their investment made, the shareholders get returns or interest in the form of dividends. A company generally pays dividends to the shareholders if they are profitable. 

What is a Share Market?

A share market is a marketplace where interested parties (buyer and seller) buy and sell shares, securities, bonds, and other financial assets. 

To buy and sell shares in the stock market or stock exchange, you need to have a trading and demat account interlinked with your bank account. You can open these accounts at any registered stockbroking firm or a depository participant. For instance, TradeSmart Online, an established stockbroking firm that deals with trading and demat account services, and much more.

Types of Shareholders in The Share Market

There are three types of shareholders, namely, Equity Shareholders, Preference Shareholders, and Debenture Shareholders. Each has different rights in the company.

Equity Shareholders: If a person buys the shares of the company, he/she becomes a part owner corresponding to the share value. They are called equity shareholders for buying the equity in the form of a share in the company. They are entitled to dividends. The dividend rate keeps differing due to multiple factors and happenings in the business. You find equity shares as a liability in the balance sheet of the company.

Preference Shareholders: Companies can boost their capital by issuing preference shares. Also known as preferred stock, people who buy these shares are referred to as or claimed to be preference shareholders. The best part of these shareholders is that they get fixed dividends on a regular basis. Irrespective of the company’s performance and profit-generating capability, preference shareholders are the first ones to get dividends. 

In the end, if the earnings are still left, the company then issues the remaining to the equity shareholders. It’s obligatory to pay dividends to the preferred shareholders. 

Debenture Shareholders: Sometimes, companies need extra money to upgrade machinery or establish a new business in another country, or for some work reasons. So, they raise funds by taking loans from the public. People who give loans or credit to the companies are called creditors,  debenture shareholders being one of them. Unlike the equity shareholders, these people are not entitled to any voting rights or decision-making in matters of the company. In return for the credit or loan, debenture shareholders are paid fixed interest. When the company ceases or liquidates, debenture shareholders are the first people to be paid, followed by preference shareholders and equity shareholders.

Types of Share Market

Share market is classified into two types, namely, primary market and secondary market. In the former, a company issues, and allocates shares to the public, whereas in the latter, the actual trade happens. Well, let’s know the difference between the two in detail.

Primary Market: It’s a name given to a fictitious marketplace where companies offer securities to the people. In this market, companies invite and sell financial instruments like shares and bonds with the aim to raise capital. When the company issues shares for the first time in the primary market, it means going for an IPO or Initial Public Offer. 

All new companies are registered in the primary market before issuing shares. The company’s shares get listed on the stock exchange post selling the shares in the primary market.

Secondary Market: After the shares are issued in the primary market they are eligible for trading in the stock exchanges. All the trading activities take place in the secondary market. All trading transactions happen through a stockbroker and a depository participant. You can avail all types of trading services by opening a trading and demat account with a stockbroking firm. If you are looking for a better trading platform, you can check TradeSmart Online. They offer trading services at the best brokerage rates. You can get customized trading products that fit your shoes.

List of Financial Instruments in Share Market

Now that you have understood the concepts of the share market, it’s very important to know the list of financial instruments that are traded on the stock exchanges. It’s classified into four divisions – shares, bonds, derivatives, and mutual funds. Let’s understand each of them in detail.

Shares: If a company wants to go public or raise funds, they approach the people for investment. Upon putting the money in the company, he or she gets the shares worth the investment made. For instance, if you have bought 5% of the company’s shares, you have ownership rights for the 5% of the entire company. A person holding a share is called a shareholder. In simple words, buying the shares of a company means buying the stake of that particular company. 

Bonds: Sometimes, companies have big projects that require enormous funds. One way to raise money is by approaching the bank for a loan. Another way is by issuing bonds. Both bank loans and bonds are almost one and the same. If the company approaches the public to borrow money, they issue bonds as a note stating that he or she will be paid at a certain future date along with a fixed interest. The creditors will get the interest through periodic intervals.

Derivatives: Futures, options, swaps are some of the most commonly used derivatives by traders and investors. Trading volume in derivatives is much higher than those in the cash market. 

Mutual Funds: While most traders or investors avoid trading due market volatility, mutual funds give traders the required push to invest in the market again. A mutual fund is an investment vehicle that collects a pool of money from investors who have a common objective to fulfill. Through mutual funds, investors can invest their money in shares, bonds, ETFs, Tax saving schemes, and other diversified holdings in the market. Mutual funds are administered by experienced professionals called fund managers. They are responsible for the growth of the mutual fund as well as your investments made in that fund. 

Who looks after the share market?

We all know that investing is risky. In order to ensure that trading takes place safely and that everyone is following the rules and regulations, we have a governing board known as the Securities and Exchange Board of India aka SEBI.  Its objectives can be summarised in three main points

  1. Protecting the investors’ money
  2. Keeping an eye on the stock market proceedings
  3. Continue to enhance and grow the stock market

The SEBI is mandated to oversee the secondary and primary markets. SEBI has the responsibility of both developing and regulating the market. It regularly comes out with new and comprehensive measures to ensure that the end investors benefit from the dealings in securities. 

Bottom Line

Every company requires capital to run its daily business operations. A company can meet its capital requirement by raising funds through the public in return for ownership and dividends. Only equity shareholders get the owner title. There are 3 types of shareholders: equity shareholders, preference shareholders, and debenture shareholders. Investors invest via two markets: the primary market and the secondary market. 

The former market is where companies issue securities to the public, and the secondary market is where you find the listed shares on the stock exchange to trade. There are various financial instruments in the market that can be bought and sold by investors. The list includes shares, bonds, derivatives, and mutual funds.

How to Close a Trading Account?

Posted on by Aditya Paleri

These days trading has become a popular mode to earn some extra money and accumulate wealth in the bank account. Also, the ease of access to trade in financial stock markets is one of the reasons why a lot of people are riveted by the concept of trading. This was not the case a couple of decades ago, but thanks to the interminable metamorphosis in technology, it has made trading a child’s play. Anyone with a gadget integrated with the internet, followed by a trading and demat account in hand, can commence their trading race expeditiously. 

Reasons why people close accounts

However, some people rush into creating trading accounts with the notion to trade regularly but end up slipping into something else. This turns your trading account into a dormant mode. Now, irrespective of the myriad benefits offered and provided by stockbroking companies or depository participants, some traders decide to shut down the trading account permanently.  There can be multiple reasons to close a trading account. 

  • A trading account is opened with a purpose to trade and earn income; but after a period, some traders show disinclination towards trading with a particular stockbroking firm. The reason could be anything like the trader might have found something other than equities, or maybe, bored of trading. 
  • The trader might have multiple trading accounts. As everything is linked to money, managing a single trading account requires a lot of work and concentration. Now, if the trader has various accounts like for equities, futures, and options, it’s obvious that, after a certain period, they decide to shut down some of the trading accounts. Because managing more than one trading account is surely a hectic job for any trader. Until and unless you are a professional trader with plenty of expertise or a finance professional cum expert who only makes money via trading online, monitoring multiple trading accounts is not as easy as falling off a log for a layman.  
  • Trading can be arduous if you are a newbie. Though you are a fervent follower of all the trade happenings online, there still lies an uncertainty as to what company shares to buy and when to buy them. It takes enough practice and a deeper understanding of stock markets to win over the erratic movements. Some don’t get along well with trading, so they pursue to close the account once and for all. 
  • Lack of success in trading is one of the common reasons heard from traders, and their verdict to close their account. While traders incorporate various trading strategies, some may work, and some don’t. Despite all the endeavors, sometimes, traders endure a series of losses. As a result, this calls for shutting down the trading account. 

A Few Things To Keep in Mind

Some traders get perplexed between closing and deactivating the trading account. If you want to take a recess from the trading activities, then instead of closing it completely, go for deactivation. Because once you shut down the trading account, there’s no way of getting it back. You cannot retrieve the account after it’s closed. 

If you want your trade again, you have to create a new trading account by enduring through the series of steps and procedures followed by e-KYC verification and self-identification for a final check. In case, if you really want to close your trading account, then here are a few pointers that you must keep in mind. 

  • If your demat account is registered with more than one name, then both the people have to sign on the trading account closing application.
  • You should give back the unutilized DIS slip or Delivery Instruction Slip booklet to the stockbroking company.
  • If you are closing the trading account that’s linked to an active demat account, ensure that there are no shares left unsold or bought. If there are any as such, either sell it in quick intervals prior to closing the trading account or rematerialize them and store those shares in the form of physical certificates. Or, if you have another demat account elsewhere, transfer them to that account by using the DIS slip.
  • It takes approximately 7-10 days to get your trading account closed permanently after submitting the trading account closure application.
  • Say, you have closed the trading account with a particular stockbroker due to some reasons or uncertainties. There’s no hard and fast rule that says or hinders or obstructs you from opening a new trading account again with the same stockbroking firm.
  • Traders won’t be charged with anything for closing the demat account at a particular depository participant or stockbroking company.
  • Though you are liberated to open and run as many demat accounts as you want at various stockbroking companies, it would be sagacious to close the dormant demat accounts to circumvent the needless charges and other expenses that squeeze your bank account.
  •  If your demat account reflects a negative balance, your trading account closure application request would be instantly declined to process further. 

Step-By-Step Guide To Close A Trading Account


Trading in India requires setting up two accounts, one is a trading account, and another is a demat account. There’s no use in having only one of the accounts. You should have both the aforementioned accounts to buy, sell, and store shares in electronic form. 

While the trading account helps you to make transactions in the financial stock market, the demat account converts those shares into electronic form and stores them in the account. Monetary settlements are taken care of by the bank account connected with these two accounts. But there comes a time, where a trader wants to close his/her trading account. So, here’s a step-by-step guide on how to cease a trading account. 

Step-1: The foremost thing you have to do before closing your trading account is to visit the respective stockbroking company or depository participant and inform them about the closure.

Step-2: As and when you do that, you’ll be given a trading account closure application to fill out all the necessary details. Prior to submission, crosscheck the whole application just to make sure there are no errors made. You can get this form on the depository participant’s website to download, or at one of their branches. 

Step-3: If your trading account has multiple holders, then all of them must duly sign the trading account closure application. In addition to that, you should also write a valid reason for why you are shutting down the trading account in the application.

Step 4: Once the form is completely filled, you can submit it to your depository participant or stockbroking company asking them to do the needful.

Step 5: Finally, check your trading and demat accounts to see if there are any shares left behind to be sold. If yes, then clear up the entire account before the depository participant processes your account closure request. In case, if you missed clearing your account, your trading account closure application would be dismissed by your DP or stockbroker. 

Apart from ensuring that your trading account does not have any unsold securities, it is also important to ensure that your account doesn’t reflect a negative cash balance. If such is a case then you would have to pay the balance or your account closure request will be rejected. And once that is done, it will take about 7-10 business days for the account to get closed

The trading account can either be a treasure trove or a nightmare for traders and investors. Of course, it’s an open platform filled with plenty of opportunities to cease and make good money. But sometimes, uncertain situations propel traders to close their trading accounts. If you are on a quest for the procedure to close your trading account, kindly follow the above steps. However, you can always open your account with the same stockbroking firm at a later stage. TradeSmart Online is a leading depository participant that allows traders to open an account online in five minutes. Click here to know more details about the TradeSmart Online trading and demat account services.

How to Open a Trading Account?

Posted on by Aditya Paleri

Financial markets have undergone a transformation since the start of the century. Open outcry form of trading gave way to electronic trading that paved an era of transparency. With improving transparency, institutions, both foreign and domestic, started their operations in India. This resulted in new investors coming to the market. 

Presently, online trading has become a rage among the young with most brokers offering an online method of opening trading accounts. 

Why Do You Need a Trading Account? 

A trading account is necessary for every trader to take part in the stock market activities to buy and sell shares, securities, commodities, and any financial underlying asset. Without having a trading account, neither you nor the broker on your behalf can facilitate the trade. 

List Of Documents Required to Open a Trading Account

Before you dive into opening a trading account, there are certain documents that you should have with you. Although the process of opening a trading account is almost the same with every DP/depository participant, submitting these documents is mandatory for all the traders.

Income Proof

  • Income Tax Return or ITR copy
  • Net worth copy or annual statement of accounts copy attested by a CA
  • Form 16 or current month’s salary slip
  • Last 6 months bank statement

Identity Proof

  • PAN card followed by a proper photo
  • Aadhaar card, Voter ID card, Driving license, and Passport (Present any one of these)
  • ID cards with one valid photo issued by the Central/State government
  • You are allowed to present ID cards provided by professional regulatory bodies like ICAI, ICWAI, or ICSI Credit/ Debit cards, banks, PSUs, commercial banks, statutory bodies, etc.

Address Proof

  • Ration card, Voter ID, Passport, Insurance document, House maintenance bill, and Telephone bill (Submit any one of these copies as address proof)
  • Electricity bill or Gas bill not older than 3 months
  • Bank passbook copy not older than 3 months
  • New house or flat address signed and attested by High court or Supreme court
  • Address proof furnished by any of the statutory bodies, namely, Scheduled Commercial Banks, Scheduled Co-Operative Bank, Multinational Foreign Banks, Gazette Officer, Notary public, Member of Legislative Assembly, and Member of Parliament.
  • ID cards furnished by universities/colleges, professional bodies like ICAI, ICWAI, ICSI, Bar Council.

How To Open a Trading Account?

To incorporate your trading knowledge, you have to go live first. For that, you have to open a trading and demat account online or offline by visiting or associating with a depository participant cum stockbroking firm. TradeSmart Online, a leading discount brokerage firm, offers both trading and demat account services. You can go paperless by opening your online trading account with TradeSmart.

Step 1: Find an Appropriate Stockbroker 

The first and foremost thing you have to do is find a proper stockbroker that fits all your trading needs. Check with the broker whether they offer all the necessary trading services demanded by you. Always keep in mind that time is money in the trading business. So, make sure the broker’s trading platform can be easily accessible both via website and app if they have one.

Step 2: Check The Differences 

Once you find the right stockbroker, check out the brokerage rates they are offering and compare them with other firms. Each stockbroking company has brokerage rates and processing charges. So, before deciding to open a trading account with any stockbroking company/firm, ask all the necessary information related to the trading account opening charges, followed by other fees details, if any.

Step 3: Fill All The Details

After finalizing the stockbroker, fill the forms of trading account, demat account, and KYC. If you are opening a trading account online, here’s the procedure to fill the form. 

  • Go to the application page
  • Enter your name, PAN details, contact number, email ID, house address, bank account details, etc.
  • Upload all the necessary documents like income proof, address proof, bank copy, canceled cheque, ID proof, and photographs.
  • Record a small video of yourself and upload the same for self-identity verification
  • In the end, e-sign the document and finish filling the form

Step 4: Final Check

Upon finishing the form filing, your data will be crosschecked by the stockbroker. As and when the details and the documents are verified, you’ll receive your trading and demat account login credentials. Now, you are ready to start trading. However, before you plan to buy any share in the market, deploy some amount from the bank account to the trading account. You can glance at the live market, make a watchlist, purchase shares of the top companies, and a lot more. 

Step 5: Power of Attorney

It’s like a personal bank account, where the customer gives the banker the limited power to change as per their instructions. POA or Power of Attorney is just the same. Here, the stockbroker is given limited authority over the trader’s account. Prior to that, you have to fill the POA given by the stockbroker to give basic access to your trading account. By doing so, the stockbroker transfers the shares to and from your trading account after every sale and purchase made. In simple words, POA allows stockbrokers to debit or credit the shares from your trading account whenever the trade transaction is made.

Key Takeaway

Every person who wants to trade in the stock market should open a trading account. Before leaping into finalizing the account opening decision, you have to find and choose the right stockbroking firm. They should be able to offer all sorts of trading services inquired by the trader. 

Besides, you should also check and compare the brokerage rates and other fees of one stockbroking firm with another. If you feel gratified about the services, you can come to a conclusion as to whether to open a trading and demat account with that firm or not. TraderSmart Online is one of the leading stockbroking firms that provide trading and demat account services at the best rates. You are just a tap away to create a trading account with them and enjoy the unceasing services.

What Is Trading Account? Everything You Need to Know About Trading Account

Posted on by Aditya Paleri

To trade in the market, be it the cash segment, derivative, or commodity, one needs to have three accounts in place. A Demat account where the shares will be stored, a bank account that will finance the buying of shares and receive money when shares are sold and a trading account to carry out the transaction. 

How Does a Trading Account Work?

A trading account is a platform where a buyer and seller meet to complete a transaction. A trader places an order to buy securities through his/her trading account. The stock exchange processes the transaction order and allots the required number of shares by crediting it to the demat account. Once the trade execution gets over, the money will be debited from the trader’s bank account to finish the trade.

When it comes to the selling, the process is reversed. A trader puts his request to sell the securities from the trading account. The order is then submitted and processed in the stock exchange. Upon execution of the order, the set number of securities or shares are debited to the trader’s demat account. Post the sale, the proceeds are credited to the bank account. 

Types of Trading account

There are broadly two types of trading accounts

  1. Securities/standard trading account

    This trading account takes care of all basic investment requirements. It allows trade equity – intraday trading, F&O trading, exchange-traded funds (ETF), mutual funds and currency futures.

  2. Commodity trading account

    This account is used to trade in the commodity market such as gold, platinum, silver, copper, crude oil etc. But this requires opening an account with registered commodities exchanges like MCX or NCDEX.

What are the Pros of a Trading Account?

It’s obligatory on the part of every person to have a trading account if he/she wants to start trading in the financial stock market. Well, this account offers innumerable benefits to the traders, if used properly. 

  • Accessibility Became Easy

    One of the best reasons to open a trading account is to have easy access to multiple leading stock exchanges in India. You can trade on any exchange you want and make profits through the transactions via your trading account. You can find all your investments, buy and sell orders placed, profits earned, payments made, expert recommendations, and many more details related to the stock market and trading account. You are just a tap away to access the top stock exchanges in India like the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), National Commodity and Derivatives Exchange (NCDEX), and Multi Commodity Exchange (MCX). 

  • Timely Information

    Trading is a tricky business, one wrong move, it’ll eat up all your trading investments. Opening an online trading account secures traders by protecting continuous movements in the prices of the shares and the stock market. Moreover, it adds value to your investment by offering plenty of other stockbroking or depository services. For instance, some broking firms provide research reports to the traders. It helps them to compare the stocks and make their next move while trading.   

  • Customized Support

    Depository participants or stockbrokers are available 24*7 to support you with their trading account services. Right from opening your trading account to providing research reports to customization, the DPs are available all the time at your service. Additionally, you can subscribe to push notifications to receive trading and investment and buy and sell alerts. These options will help you in the long run, especially while making your trading decisions. 

  • Offers Flexibility

    Be it an app or a website, convenience and comfort is the key to expanding your business further and retaining your customers. This goes the same with the trading accounts. Every depository participant or stockbroking firm has its own application and website to access deftly. As everything is online now, so is the trading account, it has become easy for traders to stay connected with the stock market on their gadgets like smartphones, laptops, PCs, or anything that has a big screen and internet connectivity. A system like this enables traders to access trading platforms wherever and whenever they want with just a push of a button. Plus, they can also monitor their transactions and trades in just one go. 

  • Uninterrupted Transactions

    No one wants to wait in long queues to buy or sell shares. Thanks to the origination of trading accounts, it saved time, energy, and cost for the traders. It gave rise to hassle-free trading, making investments easy and accessible at any point in time. Even buying and selling activity in the stock market has become plain sailing and unchallenging like before.

How to open a trading account?

To trade in securities you definitely need a demat and trading account. But if you’re trading in futures and options, you don’t even need a demat account. A trading account will suffice. The steps to open one are

  1. First, select a broker. Choose one according to your needs and which is most convenient for you. Ensure that this broker responds on time especially since time is of the essence when dealing with the stock market. Check out the user interface and ease of conducting trades to save maximum speaking of which, have you checked out the one TradeSmart offers?
  2. Next to help in finalizing the broker, compare the brokerage charges. Each broker has different charges and ensure that you ask each broker you consider all the charges before opening an account with them.
  3. Once you’ve finalized the broker, you will have to fill the account opening form and fill in the Know Your Client (KYC) form.
  4. After submitting the form either online or offline, the data entered will be verified which will be either online or offline.
  5. After the verification is done and everything gets approved, you will receive details of your trading account which you can now go ahead and start trading.

Trading account charges

To ensure that your trading goes smooth and effortless requires a lot of work and effort from the broker and to ensure that you don’t face any hassles or struggles the brokers charge a nominal fee for maintaining the account. TradeSmart however offers a free trading account for the first year to encourage new traders to try their luck in the stock market. The various detailed charges can be summarized below.

TradeSmart Charges EQUITY Delivery EQUITY Intraday
Brokerage Rs. 15/trade Rs. 15/trade
STT Rs 10000/crore Rs 2500/crore on sell side
Turnover Charges NSE: Rs 350/crore, BSE: Rs 350/crore NSE: Rs 350/crore, BSE: Rs 350/crore
GST 18% on (Brokerage + Transaction Charge) 18% on (Brokerage + Transaction Charge)
SEBI charges 0.0001% (Rs 10/Crore) 0.0001% (Rs 10/Crore)
Stamp charges State wise State wise

Futures & Options Trading

TradeSmart Charges EQUITY Futures EQUITY Options
Brokerage Rs. 15/trade Rs. 15/trade
STT Rs 10000/crore Rs 5000/crore on sell side
Turnover Charges Rs. 240/crore Rs. 7150/crore of premium
GST 18% on (Brokerage + Transaction Charge) 18% on (Brokerage + Transaction Charge)
SEBI charges 0.0001% (Rs 10/Crore) 0.0001% (Rs 10/Crore)
Stamp charges State wise State wise

Currency Futures & Options Trading

TradeSmart Charges Currency Futures Currency Options
Brokerage Rs. 15/trade Rs. 15/trade
STT NIL NIL
Turnover Charges Rs. 140/crore Rs. 5500/crore of premium
GST 18% on (Brokerage + Transaction Charge) 18% on (Brokerage + Transaction Charge)
SEBI charges 0.0001% (Rs 10/Crore) 0.0001% (Rs 10/Crore)
Stamp charges State wise State wise

Commodities Market

TradeSmart Charges MCX Futures MCX Options
Brokerage Rs. 15/trade Rs. 15/trade
STT Rs. 1000/crore Rs. 5000/crore
Turnover Charges Rs. 390/crore Rs. 2000/crore of premium
GST 18% on (Brokerage + Transaction Charge) 18% on (Brokerage + Transaction Charge)
SEBI charges Rs 10/Crore (Sebi Fees for MCX Agri Commodities is Rs 1 for Rs 1 Crore turnover) Rs 10/Crore
Stamp charges State wise State wise

When it comes to brokerage, TradeSmart offers some of the best and most affordable prices for traders.

Conclusion

The trading account keeps a track of the daily trade activities of the trader. You cannot place a buy or sell order without the trading account. If you are planning to open a trading account jointly with a demat account, approach or visit a registered depository participant or a stockbroking company. Case-in-point, TradeSmart is one such top broking company that offers customized trading services for all traders and investors. 

What is Cut-Off Price in an IPO?

Posted on by Aditya Paleri

The process of a company going public is very complex as there are multiple stakeholders involved. While the steps of going public are well defined, the time taken for such a process varies and may take months or even years. But once the IPO is set to be open for the public, there are two ways the company can approach this to set a price for its shares.

Fixed price – This as the name suggests, is when the company sets a fixed price to the shares to be sold. In this case the demand for the IPO is known only after the closure of the issue.

Book building price – In this case, the company does not set a fixed price for the shares offered to the public. Unlike the fixed price method, the price is not announced in advance. Instead the company gives a range for the investors to bid and then the final price is decided once the issue closes. In this case, we deal with two more concepts known as cut-off price and floor price. What is the cut-off price? Let’s understand in more detail.

What is the cut-off price?

The offer price for an initial public offering which is set by a company in collaboration with the merchants or managers for the IPO, which could be any amount within the price bracket is known as the cut-off price for IPO stock. This, however, should not be confused with the floor price, which is the lowest rate at which bids can be placed.

The issuer must disclose a price range or a floor price within a book-building offer. The actual discovered issue price could be either above the floor price or anywhere within the pricing spectrum. The issue price is thus referred to as the “cut-off price.”

After assessing the book and investors’ demand for the stock, the issuer and lead managers make that call. When applying for the issue, prospective investors must select the cut-off option, which shows their willingness to subscribe to shares at any price discovered within the trading range throughout the book-building phase.

At the cut-off price, authorized personnel participating in the employee reservation portion and retail individual investors are allowed to bid. Investors who are not QIBs (the qualified institutional buyers which include anchor investors) or non-institutional investors are not allowed to bid at the cut-off price.

Cut-off bids are always legitimate for allotment considerations as opposed to price bids. The price bids imply that a specified price can become invalid if the applicant’s price is lower than that which has been disclosed.

Making bids at the “cut-off price” means that the retail investor receives an allocation along with the quantity of allotment which is based on demand at varying prices.

Put Things in Perspective

A cut-off price is, therefore, a price at which shares are issued to investors, to make things simpler for a layman in the field of the stock market investment. An IPO book-building issue begins with a cost range, which includes both a minimum and a maximum limit. An investor can bid for the appropriate amount for any number of stocks at a rate that is within acceptable price limits.

The two forms of IPO pricing

When it comes to IPO pricing in India, there are two methodologies. The first one is the Fixed Price Method and the other is Book Building Method. Let’s look into the details of these two.

While in a fixed-price method, the price is determined early on by the company. It opens up the initial public offering to the general masses. On the date of the issue, the firm hands out the complete information of different investors. There is no way to predict demand for shares before the issue date using this methodology.

However, the price is not predetermined at the commencement of an IPO in the book-building method. Instead, the company declares a price range at the time of the launch. The Investors then start the bidding using this very price range. At this point, it’s crucial to maintain maximum transparency; the company, therefore, publishes investor data on a daily basis.

After evaluating the book and investors’ desire for the stock, the issuer and lead merchant or manager make this decision. Only retail individual investors are allowed to apply at this price, as per the SEBI guidelines.

Comprehending the Concept

Let’s suppose that the price bracket of an IPO is determined to be between Rs.100 to Rs.110. You apply for ten shares for Rs.105 each. As you were prepared to subscribe to the initial public offering at approximately Rs.105, you will be allocated shares at the price of Rs.104, if the determined price of issue is Rs.104.

Conversely, if the calculated price of issue is Rs.106, you will not receive an allotment of stock. But if you go for the cut-off, you will be allotted shares at the price of issue.

Investment bankers proceed to work on the price determination towards the final stage of the IPO. But, when no fixed price has been calculated, there is a range of bids that occur at distinct values. The actual price is determined by the merchant bankers by calculating the average of all the bids submitted in total and this is known as the actual cut-off. It is typically the legal price that helps establish the bids for a set of stock.

Once the IPO has reached completion, shareholders who bid below the cut-off will have their money reimbursed because they are not eligible for share allotment. Those who bid higher than the cut-off earn the difference in addition to the stock allotment. Customers who desire to buy an IPO must pick the option to buy at cut-off while completing the registration process. This means that irrespective of the cut-off price, the individual is still entitled to the allotment.

 

Understanding the Different Types of IPOs

Posted on by Aditya Paleri

Trading since time immemorial has been a means of exchanging goods, increasing wealth, and burgeoning economies. It is a part of human existence and a way to help elevate the financial status of a community and help grow job opportunities. In modern times, however, we see that there are different methods of trading now in the stock market in the form of shares and derivatives. 

The method of transforming a privately held company into a public company is known as the Initial Public Offering (IPO). This method offers smart investors the opportunity to generate an attractive return of investment.

And before you jump on the bandwagon, it is critical that you understand the fundamentals. Because not every upcoming IPO is a fantastic opportunity. Risks and benefits are inextricably linked to each other. But if you are an informed investor, investing in IPOs can be a wise decision.

What’s an IPO and Reasons Behind its Initiation

An IPO is the process by which a private company or corporation becomes public by selling a portion of its stake to investors and is known as an initial public offering (IPO).

Typically, an IPO is usually initiated for either one or all of the following three major reasons: 

  1. a) incorporate new equity capital into the existing company. 
  2. b) raise capital or funds for near future or upcoming projects.
  3. c) to monetize stakeholders’ investments.

As soon as the formalities for the IPO are completed, the company’s shares are listed and can be freely traded in the open market. The stock exchange mandates a minimum free float on shares, both in absolute terms and as a percentage of total share capital.

The initial public offering is a smart approach by which a growth-oriented corporation offer their shares to raise capital and the overall market valuation of the said firm. Though the procedure is simple but its impacts are huge in terms of equity shares and gaining a clout. 

So, if the company does well and reaps a large profit, shareholders profit handsomely. Everyone who has invested in this company has the opportunity to acquire its fortunes in proportion to their shareholding.

Types of IPOs

There are two types of IPOs, and the distinction between them is simple and straightforward:

Fixed Price Offering or Fixed Price Issue

A fixed price issue occurs when a company establishes a fixed price for all of its shares and mentions it in the offer document.

The fixed price issue requires the company to set a fixed fee at which all of its shares will be offered to investors. A merchant banker, an entity that appraises and reduces a company’s level of risk, is hired to make this happen. This merchant bank then determines the company’s total current value as well as its future prospects. Aside from finding, they also create a risk overview of all the investments and how it would compensate the investors in the event of such a massive risk. 

They determine the price of a specific share that should be fixed in order to raise significant capital for their company after studying and conducting extensive research.

The price of the stocks that the company intends to make public is then disclosed to the investors. And if investors participate in this IPO, they must ensure that they pay the full share price when submitting their application. 

Here’s an example to help you understand this better. Suppose a reputed private marketing company wants to take over a small time niche company to expand its services and customer base. They can either borrow from the bank or raise money from the public. They decide the IPO route to maximize capital.

They approach a merchant bank who evaluates the company’s prospects to determine if the company can find any investors in the market. 

The company then files an application for an IPO to SEBI along with the DRHP or Draft Red Herring Prospectus. The DRHP contains all the information about the company and if it gets approved then the company starts advertising about its IPO to attract investors and decide a date on the IPO. 

The second type of IPO is known as Book Building Offering or Book Building Issue. Let us understand what this entails:

Book Building Offering or Book Building Issue

During the IPO process, the price of the book building issue is released. In this process, the company does not set a fixed price, but there are two price bands. 

In this case, the company launching an IPO offers investors a percentage of price band on the stocks. Before the final price is determined, interested investors bid on the shares. Investors must specify the number of shares they intend to purchase as well as the price they are willing to pay per share.

The lowest price band is referred to as the “floor price,” while the highest price band is referred to as the “cap price.” Investors interested in purchasing the shares, however, must make a bid within a specific time frame before the company sets the price. And the final decision on the price of the shares is determined by the bids of investors.

Because of the book-building issue, the company does not have a fixed price, but rather price bands. The price is discovered only after an investor’s demand is generated and recorded.

Let’s understand this with the help of an example. Suppose XYZ company, a reputed startup company, wants to go public for various reasons. And so they plan an IPO. And to do so, they approach a merchant banker. The bank analyses the company’s growth potential and financial position which will help decide the share price for what investors will pay.

After all detailed analysis and research, they come up with a decision to offload 1,00,000 shares to the public and the price for the same will range from Rs. 400 – Rs. 450 meaning the minimum price that an investor has to pay is Rs. 400.

Once the bidding is done (usually for a period of 4-5 days) the company checks the bids received. It finds that 30,000 bids have been placed at Rs. 400, and 60,000 bids have been placed at Rs. 425 and 40,000 bids have been placed at Rs. 550. Since there are bids for 1 lakh shares which are Rs. 425 and above, the ones who subscribed for Rs. 400 will not get any shares.

Some other Points of Difference

Although there are many difference in both these IPOs as mentioned above, here’s a rundown of other reasons that make them distinct from one another:

Reservations:

In a fixed-price issue, half of the allocations are reserved for investors with less than two lakhs with the remainder going to high-net-worth investors.

In contrast, in a book bidding issue, some percentage of the allocations are reserved for Qualified Institutional Buyers (QIB), another percentage is reserved for small investors, and the remainder are reserved for all other types of investors.

Demand:

The demand for a fixed-price issue is unknown until the issue is closed. Conversely, the market for a book building issue can be known every day.

Payment:

In a fixed-price issue, investors must pay a full advance payment of the share price when bidding for a share. In comparison to this, in a book building issue, the payment is made after the shares have been allotted.

While there may be different types of IPOs, what is imminent in this is that if you want to be a part of the IPO process and get allotted shares to buy and sell in the future, then you have to ensure that you have a demat account for the same.

IPO Process in India

Posted on by Aditya Paleri

When a company needs to raise a large corpus of funds, it approaches the general public through a process called the Initial Public Offering (IPO). But before doing so it needs to convert itself to a public limited company and make changes to its capital structure to allow new investors as shareholders. 

There is a long drawn and well defined process by which a company raises money from the primary market and gets listed on the exchanges where its investors can either sell or trade in the shares. 

In this article, we shall look at the process of how a company gets listed through an IPO.

Applying for an IPO in India

Before we discuss the process involved in getting listed, it is important to know that the entire IPO process is regulated by the Securities and Exchange Board of India (SEBI). The market regulator has a list of criteria that needs to be met by the company. 

The steps for applying for an IPO are as follows:

Appointment of financial experts 

Financial experts such as investment bankers or merchant bankers conduct the IPO process on behalf of the company, acting as intermediaries between the company and investors. They handhold the company and guide them through the entire process of meeting SEBI’s guidelines, preparing the prospectus, pricing the issue and timing the IPO. 

Registration for IPO

The investment bankers along with the company prepare a draft prospectus and a registration statement. This document is known as the Draft Red Herring Prospectus or DRHP. The most important document that a retail investor can have access to is the DRHP as it contains a wealth of information on the company. 

As per section 32 of the Companies Act, submission of a red herring prospectus by companies is mandatory. The DRHP contains all the financial information, all mandatory disclosures as per SEBI, and the Companies Act. The key components of the prospectus include:

Definitions:

It includes definitions of industry specific terms. This section might not require diligent reading if you are analysing an offer from an industry you are well acquainted with.

Risk factor:

Every business has to confront certain risk possibilities. This section factors in all the possibilities that could materially impact a company’s performance, especially post listing.

Use of proceeds:

Is perhaps the most important section of RHP. It gives information about how money raised for investors will be used.

Industry Description:

This section provides forecasts of the larger industry in which the company will function.

Business description:

Details the core business activities of the company. It talks about how a company generates its profits.

Management:

Data and details about key management personnel, promoters and directors are provided in this section.

Financial information:

This section provides the auditor’s report and other financial information.

Legal and other information:

This section details the lawsuits against the company along with miscellaneous information.

Verification:

This step involves verification by SEBI as it looks for errors and discrepancies. Only after SEBI approval can a company set a date for its IPO.

Applying to the stock exchange:

The Company then applies to the stock exchange where it wants to get its stocks listed.

Creating a buzz:

Companies strive to create a buzz in the market before its IPO is open to the public. The company advertises the impending IPO in order to attract potential investors. The company management goes on a roadshow to sell the issue by meeting various funds, brokers and big investors. Media interaction is also part of the road show in order to advertise the key features of the company and highlight its credentials.

Pricing:

Pricing the IPO is an important task for which the company has two options of going through the IPO – a fixed either through fixed price offering or a book building offering. 

In the case of book building offers a price range of 20% is announced and investors can place their bids within the price bracket. On the other hand in the case of fixed price shares the price of a company’s stock is announced before-hand. 

As far as the bidding process is concerned the bid is supposed to be placed as per the Lot Size which is the minimum number of shares to be purchased. The company also provides the IPO Floor price and the IPO Cap price. The former is the minimum bidding price and the latter the highest. The bid is usually open for 3-5 days and investors have the option of revising their bids within the time frame. When the bidding process is complete, the company decides the cut-off price i.e. the price at which shares will be sold.

Allotment of shares:

After the completion of the bidding process, the company decides the number of shares to be allotted to each investor. The company also ensures that no internal investors participate in the IPO trading process. This prevents manipulation or fraud. IPO stocks are allotted to bidders within 10 working days of the last bidding date.  

 

Online and Offline Methods of applying for an IPO-

The online method of applying for an IPO is through a stock broker’s website. This is the most convenient method of applying for an IPO. The process to apply for an IPO from TradeSmart is also very easy and simple. The entire step-by-step method is detailed out here so that you don’t face any issues and is done seamlessly.

The offline or traditional method of applying for an IPO is by filling in a physical application form and submitting it at the nearest collection centre. You will have to approach your bank or your stock broker, fill out the application form. Ensure that your details and your PAN and demat account number are correctly mentioned if not you will not be able to get any allotment of shares. Once you check the details, submit the form along with the cheaque of the amount to your bank or broker and they will ensure the funds are kept aside for allotment purposes.

Note that whether you apply for an IPO online or offline, it is mandatory to have a demat and trading account in order to store the shares and sell them if you wish to in the future. TradeSmart demat account is easy to open which hardly takes 10 minutes to enter the world of trading and investing.

What is Pledging of Shares?

Posted on by Aditya Paleri

In layman’s terms, pledging of shares is nothing but taking a loan against existing shares that an investor is holding. As shares are considered as assets, this allows the promoters of a company to use their shares as collateral to complete their financial obligations. During pledging of shares, the borrower shall continue to have ownership of the shares and also continue to earn dividends on the same. Shares can be pledged for any purpose including requirement of working capital, new ventures, to trade in the equity market, futures and options, or even personal financial requirements.

As the value of the shares keep changing due to market fluctuations, as does the value of the pledged shares. The promoters have to maintain the value of the collateral as agreed in the contract. If the value of the pledged shares decreases and falls below the amount agreed upon, the borrower will have to increase his collateral either by bringing in more cash, or adding more shares to the already pledged ones. The lenders also have the option to sell off the pledged shares in an event where the borrower fails to pay the collateral value, or make up for a difference in the value.

Pledging is generally considered as a last resort taken by promoters in order to raise funds. A few safer bets available to promoters are through equity funding, or other loans. When promoters turn to pledging their shares, it means that they cannot raise funds by other means.

The Risk behind Pledging of Shares

When promoters pledge their shares as collateral in order to take loans, it might not cause too many problems in a positively trending market, or a bull market, as the market is moving upward, and the investor sentiment is positive. The risk arises when the market starts to fall, that is in the bear market. As the market value of the shares keeps changing on account of market fluctuations, the value of the collateral will also fluctuate as the shares fluctuate. Most contracts will require the borrowers to maintain the amount of collateral. In the case that there is a drop in the value of the shares, the borrower will be required, as agreed in the terms of the contract, to maintain the amount of collateral by pledging more shares, or by bringing in more money. If the borrower is not able to make up for the difference in the collateral amount, the pledged shares will be sold in the open market in order to recover the money.

When pledged shares are sold in the open market, there can be a chance of a great fall in the value of the share. This panic selling by other shareholders will further cause a shortfall in the collateral amount of the borrower. This can be even more disastrous to the borrower, because as the price falls, the borrower will have to pledge more and more shares, or bring in more and more capital to make up for the shortfall in the collateral amount.  Additionally a selloff of pledged shares can lead to a change in the shareholder pattern of the company. This can affect their voting powers in the company, and they may not be able to make critical decisions on behalf of the company.

 Advantages of Pledging Shares

  • Lower Interest Rates: When a borrower pledges his shares as collateral, he is granted a secured loan. Secured loans are preferred to unsecured loans as the lender can easily recover the amount borrowed, in an event where the borrower defaults, by liquidating the collateral. It is easier to avail a secured loan, and the interest charged on secured loans is much less than that charged on unsecured loans. Additionally if the borrower has a poor credit history, pledging shares as collateral could be the only way to obtain a loan.
  • Easy Access to Cash: Liquidity is the ability to easily convert an asset to cash form. A shareholder who requires cash can obtain liquidity using shares in two different ways. Firstly by selling the shares, however this could result in the shareholder having a tax liability if there is a profit. Additionally the shareholder would lose out on dividend income in case the shares are sold. The second option will be for the shareholder to pledge the shares as collateral, and take a secured loan. The shares aren’t sold, so there is no resulting tax liability, and the borrower will continue to receive dividends from the shares.

 Disadvantages of Pledging Shares

  • Shareholder Risk: The main disadvantage of pledging shares is the risk it poses to shareholders. In case a borrower who has pledged shares as collateral defaults on the loan, the lender has the option to sell the shares. If the amount of shares pledged is large, the market value of the share can take a massive fall, and will cause losses for shareholders. If the borrower who has defaulted is a promoter of the company whose shares he had pledged, then the default would take on the appearance of stock sale by an insider, this could show the company in a negative light. This could also cause a fall in the market value of the share.

The final verdict

Pledging of shares generally occurs in companies where the shareholding of the promoters is high. Normally pledging of shares above 50% is considered risky for the promoters.

It is advisable for retail investors to avoid companies who have a high pledging percentage, so as to avoid unnecessary trouble. As pledging of shares shows that the company has a low cash flow, low credibility, high debt, and that they are unable to meet their short term requirements.

Pledging of shares is not always a negative point for a company. A lot of companies are able to recover the pledged amount from their borrowers, and sometimes the amount borrowed is used to better the company itself, including new products, services and even new projects. These can oftentimes create a huge boost for companies.  If companies have a good and increasing operating cash flow, and good future prospects, then it is not a big concern if their shares are pledged. In these cases pledging of shares helps in expanding the growth and revenue of the company. It is not a big problem if the companies whose shares are pledged are a fundamentally sound company.  Shares pledged in small quantities are easy to manage, but the problem arises when there are too many shares pledged.

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