NEERAJ CHITKARA

COST OF INVESTING IN SECURITIES

NEERAJ CHITKARACOST OF INVESTING IN SECURITIES

Cost of Investment in securities can be also termed as transaction cost.

Which can be divided into broad headings: Trading Cost Clearing Cost Settlement Cost

NEERAJ CHITKARATRADING COST Trading costs consist of brokerage cost, market impact

cost and securities transaction cost.

Brokerage Cost: Brokerage Cost is the brokerage paid to the broker. Due to heightened competition in stock broking, brokerage cost has fallen significantly.

Market Impact Cost: It is the difference between actual transaction price and the 'ideal price'.

Securities Transaction Cost (STT): It is the levy on securities transaction. Currently, for delivery based trades in equally b/w the buyer & seller. This means that for a transaction worth Rs. 100, the buyer and seller have to pay 10 paise each.

NEERAJ CHITKARACLEARING COST

When a negotiated trade takes place, the counterparty may default

OR

When a trade takes place on an exchange, the exchange may default in its payment. Clearing costs are costs experienced in resolving such defaults.

NEERAJ CHITKARAROLE OF CLEARING CORPORATION

While the stock exchange provides the trading platform, the clearing corporation looks after the post- trade activities such as:

Clearing all trade Determining the obligation of members Arranging for pay-in of funds/securities Arranging for pay-out of funds/securities Guaranteeing settlement Collecting & maintaining margins/collateral/base

capital/other funds.

The clearing corporation is connected electronically to the exchange, the clearing bank, depositories, custodian and members.

NEERAJ CHITKARASETTLEMENT COSTS

A trade is finally consummated when securities and funds actually change hands. Settlement costs are costs associated with such transfer.

Today settlement costs have come down due to: Advent of dematerialization Elimination of stamp duty on dematerialized

trades a Improvement of banking technology

NEERAJ CHITKARA

COMPARISON OF COST MID-1993

TODAYTRADING 3.75%

0.40% BROKERAGE COST 3.00% 0.25% MARKET IMPACT COST 0.75% 0.15%

CLEARING COUNTERPARTY RISK Present

Absent

SETTLEMENT 1.25% 0.10% PAPERWORK COST 0.75% 0.10% BADPAPER RISK 0.50%

0.00%

TOTAL 5.00%(+Risk) 0.50%

NEERAJ CHITKARA

TRANSACTION COSTS

Thanks to the introduction of screen-based trading and electronic delivery transaction costs have fallen sharply in India.