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Accounts

Types of Accounts

“Online” accounts

BMA’s “Online” investment account allows investors the facility of being able to trade online from any p.c. in the world. This would be complemented by BMA research which would be available via email or on our secure website exclusively for BMA Clients. Since this service would not give the facility of live consultants, it is the more economical of the two available account types.

“Combo” accounts

BMA’s “Combo” investment account allows investors to trade online, on the phone, and walk-in trading at our growing network of BMA BMA Trade outlets. In addition to all the research accessible in the Online account, our investment consultants would be available to advise clients on their trading accounts based on the strong BMA Research capability.

BMA BMA Trade will give clients the facility of CFS (Continuous Funding System,), and initially allow trading in the Ready market for shares. Eventually the business plans to facilitate both Futures and Provisional Trading as well.

Nature of Accounts

Buying Warrants

Buying warrants are a way to wager on future prices - though using warrants is very different from selling short. Warrants guarantee, for a small fee, the opportunity to buy stock at a fixed price during a specific period of time. Investors buy them if they think a stock's price is going up.

For example, you might pay Rs.1 a share for the right to buy Dove Co stock at Rs.10 within five years. If the price goes up to Rs.14 and you exercise (use) your warrant, you save Rs.3 on every share you buy. You can then sell the shares at the higher price to make a profit (Rs.14 - (Rs.10 + Rs.1) = Rs.3), or Rs.300 on 100 shares.

Companies sell warrants if they plan to raise money by issuing new stock or selling stocks they hold in reserve. After a warrant is issued, it can be listed in the stock columns and traded like other investments. A wt after a stock table entry means the quotation is for a warrant, not the stock itself.

If the price of the stock is below the set price when the warrant expires, the warrant is worthless. But since warrants are fairly cheap and have a relatively long lifespan, they are traded actively.

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Margin Account - Buying on Margin

Buying on margin lets investors borrow some of the money they need to buy stocks.

Investors who want to buy stock but don't want to pay the full price can leverage their purchase by buying on margin. They set up a margin account with a broker, sign a margin agreement (or contract), and maintain a minimum balance. Then they can borrow up to 50% of the price of the stock and use the combined funds to make their purchase.

Investors who buy on margin pay interest on the loan portion of their purchase, but don't have to repay the loan itself until they sell the stock. Any profit is theirs. They don't have to share it.

For example, if you want to buy 200 shares of a stock selling for Rs.40 a share, the total cost would be Rs. 8,000. Buying on margin, you put up Rs. 4,000 and borrow the remaining Rs. 4,000 from your broker. If the stock price rises to Rs. 60 and you decide to sell, the proceeds amount to Rs. 12,000. You repay your broker the Rs. 4,000 you borrowed and put Rs. 8,000 in your pocket (minus interest and commissions).

That's almost a 100% profit on your original Rs. 4,000 investment, Had you used all your own money and laid out Rs. 8,000 for the initial purchase, you would have made only a 50% profit: a Rs. 4,000 return on an Rs.8,000 investment.

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Margin Minimums:

To open a margin account, you must deposit Rs. 2,000 in cash or eligible securities (securities your broker considers valuable). That's the minimum margin requirement. All margin trades have to be conducted through that account, combining your own money and money borrowed from your broker.

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Leveraging Your Stock Investment:

Leverage is speculation. It means investing with money borrowed at a fixed rate of interest in the hope of earning a greater rate of return. Like the lever, the simple machine that provides its name, leverage lets the users exert a lot of financial power with a small amount of their own cash.

Companies use leverage, called trading on equity, when they issue both stocks and bonds. Their earnings per share may increase because they've expanded operations with the money raised by bonds. But they must use some of those earnings to repay the interest on the bonds.

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Margin Calls:

Despite its advantages, buying on margin can be very risky. For example, the stock you buy could drop so much that selling it wouldn't raise enough to repay the loan to your broker. To protect themselves in cases like this, brokers issue a margin call if the value of your investment falls below 75% of its original value. That means you have to put additional money into your margin account. If you don't want to meet the call, or can't afford to, you must sell the stock, pay back the broker in full and take the loss even if you think the stock will rise again.

For example, if shares you bought for Rs. 8,000 declined to Rs. 5,600, the value would be less than 75% of the investment price. To meet the margin requirement of Rs. 6,000 (75% of Rs.8,000), you would have to add Rs.400 to your account to bring it back within the acceptable limits.

Brokerage firms may set their own margin levels, but they can't be less than the 75% required by the Federal Reserve. During crashes, or dramatic price decreases in the market, investors who are heavily leveraged because they've bought on margin can't meet their margin calls. The result is panic selling to raise cash, and further declines in the market.

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Commissions

The commission you pay to buy and sell stocks is divided-by prearranged contract-between your broker and the brokerage firm. The firm sets the commissions and any additional fees.

The Broker's Role

Several different types of stockbrokers get involved in buying or selling stock. You're in touch with the ones who take your orders, either over the phone or in person. Depending on the firm they work for, they're known as account executives, financial consultants, investment executives, portfolio salesmen or something similar. They pass the orders to a floor broker who does the actual buying or selling.

When your order reaches the floor of the exchange, the floor broker takes it to a specialist in that particular stock, which maintains a post on the exchange floor. At that post, the floor broker who wants to buy a specific stock may meet another floor broker who wants to sell, or vice versa. If not, your order is left with the specialist, who keeps a list of unfilled orders.

As the price of the stock changes, and buy and sell orders flow, the specialist tries to fill your order at the best price. In that sense, the specialist serves as a broker to the brokers, charging them a commission for each deal completed.

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