Stock Trading Terminologies

  1. Margin Amount

    Margin Amount is the amount an investor deposits while opening a trading account with a broker.

  2. Margin Funding

    Money borrowed by an investor from a broker to purchase securities. This practice is referred to as “buying on margin”. This allows investors to take a higher exposure, thus amplifying gains and losses.

  3. Contract Note

    A broker has to issue a contract note to clients for all transactions in the form specified by the stock exchange. Only the broker can issue contract notes.

The contract note along with other entries should have following:

  • Name, address and SEBI Registration number of the Member broker
  • Name of Partner /Proprietor /Authorized Signatory
  • Dealing Office Address/Tel No/Fax no, Code number of the member given by the Exchange
  • Unique Identification Number
  • Contract number, date of issue of contract note, settlement number and time period for settlement
  • Constituent (Client) Name/Code Number
  • Order number and order time corresponding to the trades
  • Trade number and Trade time
  • Quantity and Kind of Security brought/sold by the client
  • Brokerage and Purchase /Sale rate are given separately
  • Service tax rates and any other charges levied by the broker
  • Securities Transaction Tax (STT) as applicable
  • Appropriate stamps have to be affixed on the original contract note or it is mentioned that the consolidated stamp duty is paid
  • Signature of the Stock Broker/Authorized Signatory

Settlement Types In a Rolling Settlement, trades executed during the day are settled based on the net obligations for the day. So, if an investor purchases 100 shares in the morning and sells 50 shares in the afternoon, he is obliged to pay for 50 shares on a net basis. In contrast, an account period settlement is a settlement where the trades pertaining to a period stretching over more than one day are settled. For example, trades for the period Monday to Friday are settled together. The obligations for the account period are settled on a net basis. Account period settlement has been discontinued since January 1, 2002, pursuant to SEBI directives. Presently, the trades pertaining to the rolling settlement are settled on a T+2 day basis where ‘T’ stands for the Trade day. Hence, trades executed on a Monday are typically settled on the following Wednesday (considering 2 working days from the trade day). The funds and securities pay-in and pay-out are carried out on T+2 day.

Corporate Actions Corporate Action is an event initiated by a company that causes a material change and affects the securities (equity and debt) issued by a company. Corporate actions are typically approved by the board of directors and authorized by shareholders. Some examples are dividends, stock splits, bonus issues, mergers and acquisitions, rights issues, etc.

Dividend Dividend is the portion of the company’s equity paid directly to shareholders. The company provides the amount, frequency of dividend (monthly, quarterly, semi-annually, or annually), payable date, and record date. The exchange that the issue is listed on sets the ex-dividend/distribution (ex-d) date for entitlement. A company is under no legal obligation to pay dividends.

  • Declaration date: Date of announcement of dividend by the company
  • Record Date: The date that a stock must be in the investor’s account to receive a dividend
  • Payable Date: The date that a company pays a dividend or stock split out
  • Ex-Date: The date that the buyer of a stock is not entitled to the upcoming declared dividend/distribution, because the buyer will not be a holder of record. The exchange that the company is listed on sets the ex-d date, based on the settlement cycle.

Bonus Issue It is basically a stock dividend where the company issues free shares of its stock to existing shareholders. For instance, if an investor holds 200 shares of a company, which declares a bonus of 2:1 (i.e. 2 bonus shares per share), he gets 400 shares for free and his total holding will increase to 600 shares. Companies issue bonus shares to encourage retail participation and increase the equity base. When price per share of a company is high, it becomes difficult for new investors to buy shares of that particular company. Increase in the number of shares reduces the price per share. But the overall capital remains the same even if bonus shares are declared.

Stock Splits Stock Splits increase the number of shares outstanding, by reducing the face value per share of the company’s stock. Stock split is done to infuse liquidity and to make shares affordable for various investors who could not buy the shares of that company before due to high prices. For example, a 2:1 stock split means that shareholders will receive 2 shares for every share they currently own. The split will double the number of shares outstanding and reduce the face value by half per share. So, a shareholder owning 2,000 shares out of 100,000 before a stock split would own 4,000 shares out of 200,000 after a stock split.

Rights Issue A rights issue to existing shareholders entitles them to purchase additional shares directly from the company in proportion to their existing holdings generally at a discount to the current market price and within a fixed time period.