Once a company is listed in the stock exchange, investors can take part in trading. They have to go through a exchange-registered broker, who will charge a commission (called brokerage) for each transaction. Brokerages usually range from 0.3%-0.5% for online trading sites. Other than the brokerage charge, the investor will also have to pay a Securities Transaction Tax (STT @0.125% of transaction), service tax(@10.3% of brokerage), and stamp duty/registration charges. The last one is needed for the digital contract note, which the broker needs to deliver to the investor for each transaction. This is a legal document for the transaction, and might be needed for income tax verification. Since all these charges will apply for both buying and selling, the total charges will come to around 1.0-1.5% of the amount you invested, whether or not you make a profit!
To buy/sell a share, you need to specify a price and a quantity. This is electronically send to the Stock Exchange Queue. The transaction takes place when there is a corresponding seller/buyer to match your price (and for as much quantity as possible). Most online traders allow you to specify either a “Limit Price” or “Market Price”. When you set a Limit Price, shares won’t be bought/sold until this price is reached. If you set Market Price, you need not set any price; the transaction will be executed at the current price. The advantage of Limit Price is that you are safe from sudden fluctuations (like a 5% drop on some bad news), but sometimes your order may not get executed since there is no corresponding seller/buyer at the price you specify. The exchange takes in orders for only one day – so all unfulfilled orders are canceled at the end of day. Some online traders, however, allow you to carry on the same price on subsequent days also. They do so by generating an automatic request to the exchange at the start of the each day until your order is executed. It is always preferable to set a Limit Price than a Market Price.
The above are applicable for what is called Cash Trading or Delivery-based Trading. You invest some amount, get a percentage of ownership, and are entitled to company profits/dividends in the same ratio as your ownership percentage. You might be surprised to know that only around 15% of trades happen in cash segment in Indian stock markets, 85% of trades happen in pure gambling – called margin trading, which we cover in our next issue.