ഇന്‍വെസ്റ്റ്‌മെന്റ് ഇന്‍ ഇക്വിറ്റി ( ഭാഗം-14 - സുനില്‍ . എം.എസ് )

സുനില്‍ . എം.എസ്



Investment in Equity (Part 14)

Speculation and daytrading were the main topics in the preceding chapter. When we purchase scrips with our own cash, it is not speculation, it is a transaction fully supported with cash. When our purchases exceed our cash balance, we are entering the domain of speculation. In the same way, when we are selling scrips which we are holding, it is not speculation since the deal is fully covered by scrips. But, when we are selling more scrips or shares than we actually hold, then we are speculating.

A bit more about speculation. I had mentioned that the NSE dealers might allow you to speculate. They might allow you to buy scrips far beyond your cash balance. They stipulate margin for each scrip. For buying a scrip intraday, you need to remit only the margin amount. Let us imagine that the margin stipulated for Tatasteel is just 10%. Let us also imagine that the price of Tatasteel is Rs. 300. Since the margin stipulated on it is 10%, if you remit Rs. 300 to the dealer, he might allow you to buy 10 shares of Tatasteel intraday. This will be subject to the condition that the position should be closed well before the trading hours come to an end. I will cite my dealer as an example. If I create a speculative position intraday, and if I do not close the position by 3 PM, my dealer himself closes the position in the next five or 10 minutes. The computerized trading system which he uses, is programmed to close all such speculative positions during the first 10 minutes of the last half hour of trading.

As I had mentioned in the preceding chapter, the intraday speculative position can be long as well as short. I might have gone long in some scrips while I might have gone short in some others. Or, I might have gone short in all the scrips. Or, I might have gone long in all the scrips. Whatever be my speculative positions, I have to close them all by 3 PM. As already mentioned, if I do not close them all myself, my dealer will close all those positions in the first 10 minutes of the last half hour. On some days, the dealer may have a large number of speculative positions to close, and the automatic, system-driven closure of the speculative positions might get delayed by five or ten minutes.

Thus there are two different pairs of deals. One pair is cash deals: we buy with our own cash, and we sell our own holdings. The other pair is intraday speculative deals: we buy far in excess of our cash balance, and we sell far in excess of our holdings. So, cash deals and intraday deals are the two kinds of deals. When we purchase with our own cash, we can hold the scrip for any period of our choice. But when we buy far in excess of our cash balance, we have to sell them away and thus close the speculative positions well before the trading closes. The same thing applies to sales also. If we have sold more than what we are holding, we will have to compulsorily close the short position (by buying the scrips back, i.e., by coverbuying) well before the trading closes. On the contrary, if we are selling only what we have been holding, we will be under no compulsion to buy the scrips back.

The brokerage too might vary. The dealer will charge a lesser rate of brokerage on every deal (whether cash or intraday) which gets squared up or closed on the same day. If we buy a scrip with our own cash as soon as the trading begins, and sell it away before the trading closes, brokerage will be charged at a lower rate because we squared up the position on the same day. If we buy a scrip with our own cash, and do not sell it away on the same day, the brokerage charged in this case will be higher than that charged on intraday transactions. Likewise, let us imagine that we have been holding a scrip for the past several days, and we sell it away today. In this transaction, we sold what we had, and we did not buy the scrip back. This involves delivery of the scrip, and therefore a higher rate of brokerage will get charged on it. When you buy a scrip and do not sell it away, the dealer will have to collect the scrip from NSE, and deliver it to you. Since delivery is involved, the higher rate of brokerage will be charged. When you sell a scrip which you have been holding, and if you do not buy it back on the same day, your dealer will have to take that scrip from your account and deliver it to NSE; NSE will deliver it to the buyer. Here also, delivery of scrip is involved, and the brokerage charged will be more. Where delivery of scrip is not necessitated, the brokerage will be lower; where delivery is necessitated, the brokerage will be higher.

The foregoing was given merely as an information. I must make it very clear at this juncture that my theory does not,  in any way whatsoever, support speculative deals. Under the theory, our purchases will always be within our cash balance, and our sales will always be within our holdings. We never exceed our cash balance or holdings. We never transgress into the domain of speculation. This protects us from all the risks and strains of speculation.
Let us imagine that we have bought a scrip today, in accordance with my theory. Let us also imagine that we had enough cash balance with the dealer to meet the purchase and its brokerage thereon. The settlement of the purchase will take place on T+2 basis. If today is June 17, the scrip will get credited to our account on June 19, provided there is no intervening holiday. Only after the scrip gets credited to our account, can we sell it away. That means, we will not be able to sell the scrip tomorrow, since the scrip will not have arrived in our account tomorrow. Here rises the question: how will we be able to sell the scrip tomorrow, if the price movement is such that the theory demands the scrip to be sold tomorrow? The question is quite reasonable. Here is one solution: if the scrip is a heavily traded one, most dealers will have a collection or a pool of such scrips which they will use to eliminate such hitches. The dealer will deliver the scrip from his pool account on behalf of us, and, when our scrip arrives, he will appropriate it back into the pool.

Although the dealer might help us out in such circumstances, he won't be able to help us if our sale happens to be for a very large quantity, such as 5000 shares. It is quite possible that the dealer doesn't have enough shares of the scrip in his pool to meet our sale. In such cases, where we sell the scrip before it arrives into our account, we might be landing ourselves into trouble. We will fail to deliver the scrip which we have sold. At the same time, NSE has the obligation to deliver the scrip to the buyer on T+2 basis itself. If we fail to deliver, NSE will buy the scrip from the open market through a public auction, and deliver it to the buyer. Here there is a problem: NSE will charge us a penalty of 20% for having failed to deliver to NSE by the due date, the scrip which we had sold. Needless to say, this penalty can be huge, if the quantity we had sold was huge.

Being proactive will be a great help in such occasions. If your holding in a scrip has risen to say, 5000 shares, you need to discuss the matter with your dealer. You need to ascertain from the dealer, whether he would be able to deliver 5000 shares of the scrip on your behalf, if you are forced by the price movement to sell the scrip before it gets credited to your account. If the dealer assures you of it, fine. If he says that he won't be able to churn out that kind of a quantity, you have two options: one, to switch your account to a dealer who will be able to take care of your needs. Two, proactively limit the volume of each of the scrips you deal in, to the levels which are within the comfort level of your dealer. If the latter is the option open to you, then you can start dealing in a larger number of heavily traded scrips so that the quantity in each scrip may remain at lower levels which are well within the capabilities of your dealer. The intention should be to avoid failure in the delivery of scrips sold.

From the foregoing paragraphs, you might have guessed that you will need two accounts with the dealer. One, an account in which all the amounts you pay your dealer will get credited. When the dealer pays you, all such amounts of withdrawal will be deducted from this account. This is somewhat similar to a savings bank account. This account is often known as the trading account. When you buy a scrip, its amount is deducted from this trading account. When you sell a scrip, its sale proceeds are credited to this trading account.
But, when you buy a scrip how does the scrip come to you, or, how do you receive it?
This question needs some explanation. It is here, the second account becomes necessary. This account will be exclusively for crediting and debiting scrips only. Amounts will not be credited or debited to this account. When you buy 10 shares of scrip A, all the 10 shares of scrip A will get credited to this account on the due date (that is, on the T+2 basis). When you sell 3 shares of the scrip A away, 3 shares will get deducted from this depository account. The remaining seven shares will continue in the account. The account, which is exclusively for crediting and debiting scrips, is known as a depository account. While the trading account is an account with the dealer, the depository account is actually an account with a depository. There are two depositories in India: (1) National Securities Depository Limited, and (2) Central Depository Service Ltd. The former is called NSDL, and the latter, CDSL. Although your dealer will help you open both the accounts, only your trading account will be with the dealer, while your depository account will be with either the NSDL or the CDSL. You can choose the depository yourself.

When a scrip gets credited to your depository account, you will get an SMS from the depository itself. Likewise, every debit to the depository account, also, will be intimated to you through an SMS.

Whenever you have an account, you will incur some charges on it. It will always be better to find out from your dealer, the extent and periodicity of his charges. The necessary funds to meet all these charges should be provided well before the charges are debited.
Needless to say, you will also need a bank account. All payments to the dealer should be from this bank account. Likewise, the dealer's payments to you will go straight to this bank account. If you make an online payment to the dealer, the amount might get credited to your trading account in a matter of hours. Likewise, the online payment which the dealer makes, might get credited to your bank account in a matter of hours. However, delay is possible.

(To continue)

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