Stock, Share or Equity: It is actually a share in the company as an investor. Overall price of this share (also Script or Security) has two components-
- Book Value which is the actual share owned in the company
- Market Price which is the price assigned to it by the perceptions of the traders regarding its fundamental health
Book Value can not be changed by the market participants. It can only change by corporate actions of the company.
Market Price is determined by the participants as to how they perceive the overall outlook for the company.
Benefits of buying a share: Financial benefits come in two forms-
- Dividends from the company which are the investor's share in the company's profit and are based on the book value of the total shares held by him/her. These are not liable for tax as the same has already been paid by the company. These are valued by whole time investors, and their amount is declared by the company.
- Capital Gains are the profits made by the difference in the market price between buying and selling, and is valued by the traders who buy and sell the shares for this profit.
Stock Exchange: This is the market where participants buy and sell these shares.
Every one cannot access these markets directly....it is open only to its members who have to undergo a strict membership process before they are allowed entry.
These members however can also trade on behalf of their clients.
So one has to sign up as a client with a member for trading in these markets.
That is why one opens up an account with a broker who has this membership.
Demat Account: This is an account which the broker opens up for his client in a central record keeping agency which keeps all records in digital form as to the name and amount of the different securities owned by a client. This account has an annual maintenance charge payable by the client.
The broker will also give a trading account to his client in his books for the purpose of buying and selling stocks. All buy sell data is updated in the Demat Account without the client having to do anything.
The broker will of course need funds to be deposited by his clients with him to facilitate this buying and selling.
The broker can either provide the clients with a trader terminal for the computer or smartphone for them to trade, or the same can be done by clients via phone lines by calling.
Charges for the clients: Besides the annual demat charges, other charges payable by a client are-
- Brokerage charges for each trade whether buy or sell. These are paid to the broker for his services, and are the single largest component of the total chargeable amount
- Stamp duty, Transaction charges and Exchange Charges which are payable to the exchange and the government. These are nominal charges collected by the broker from the clients and deposited with the appropriate authorities
- Service Tax Charges on all the above payable to the Government and again collected by the broker himself
These charges are to be borne in mind before calculating the net profit.
Tax Liabilities on the profits: Capital gains or the profits are of two types-
- Long term when selling is after one complete year or more of buying- No tax liability
- Short Term when stocks are sold before one year is completed and liable for short term gain tax on the profits
- Dividends are not liable for tax
Maintaining proper record is a must to ensure compliance with tax liabilities.
Contract Note: A document provided by a broker to his client after each day of activity by the client, mentioning the details of the trade and the fund utilization towards trade as well as the charges as mentioned above. These notes need to be compiled by the client for his/her records. This can be done manually in a hard copy or using worksheets on computer or accounting software. Some software have an inbuilt capability to import these notes and compile them for various profit and loss reports, and are actually very handy for active traders.
