Be ‘vigilant’ when investing in stock market
Continued from last week
During the last few weeks in this article series, the dire need for investors to educate themselves on the stock market prior to investing was stressed on. Another vital factor behind reaping higher returns from the market is to be a vigilant investor. You should not only be concerned in looking out for investment opportunities but should also pay attention to the documents/agreements you sign and financial statements you receive. Failure to do so might result in financial losses.
The article will unfold a few important agreements, documents and financial statements that an investor should be familiar with when investing in the stock market.
Confirmation of trades
(Also known as bought/sold notes) The stockbroker firm has to send a note to the client confirming the purchase or sale of securities by the end of the trade day. It will be posted or emailed to you based on the instructions given.
A bought/sold note usually includes the points stated below:
Date
Client’s CDS account number
Name and address of account holder
Name and address of stockbroker firm
Contract number
Name of the stock
Quantity of shares purchased
Price at which the quantity purchased
Brokerage fee/CDS fee/CSE fee/SEC fee/ government taxes
Net amount.
When a stock is purchased, the net amount will be the total value of the purchase (quantity*price) plus the brokerage fee, CDS fee, CSE fee, share transaction levy and SEC fee (Cess). When a stock is sold, the net amount is computed by deducting the brokerage fee, CDS fee, CSE fee, share transaction levy and the SEC fee from the total value of the purchase.
Settlement day. When a stock is purchased, the money should be paid within three trading days and it is referred to as the settlement day. Carefully read every note you receive and file them for future reference. Verify if the name of the stock, price and quantity purchased are in line with the instructions given by you. Pay attention to the brokerage fee/CDS fee/CSE fee/SEC fee/government taxes levied on the transaction.
Table 1 states the brokerage fee/CDS fee/ CSE fee/SEC fee/government taxes levied on transactions.
If any form of discrepancy occurs, contact the chief compliance officer of the stockbroker firm as soon as possible. If they fail to respond to your complaint within a reasonable period of time, you could contact the CSE immediately.
The CSE has included sufficient regulations to safeguard investors from omissions and errors in these documents. However, these regulations cannot be enforced if the investor does not inform the relevant authorities within the stipulated time period. Thus is the importance of going through these documents in a timely manner. It is also advised that the investors request for their statements via email as you will be able to update yourself on the transactions and take prompt action if any discrepancy occurs.
These documents help the investor to understand the trading pattern of the advisor. It is useful when an investor has signed a Discretionary Account. Don’t be in the habit of calculating the profit/loss of an investment by simply taking to account the bought and sold price of a share. The brokerage fee and the rest of the taxes stated above should also be taken into account when calculating the profit/loss.
There are times where the investor gets a profit prior to including the brokerage and other taxes but does not get any profit when the brokerage and other taxes are included. The bought/sold notes are the only documents the client gets that include the brokerage fee and other taxes in detail. Thus, it is vital for investors to carefully read the document.
Usually these documents are electronical- ly generated and cannot be amended manually unless there is a valid reason. If it is amended, it has to be approved by the chief executive officer or the compliance officer.
Statement of accounts
A stockbroker firm will send the statement of accounts to all clients who are debtors (investors who haven’t paid for the shares within three trading days), on a monthly basis by the seventh day of the following month. This statement is sent to all debtors who have done transactions during the month. The interest charged on delayed payments and the receipts and payments during the month under reference will also be included in the statement. A statement of accounts could include the following.
Client name/CDSnumber
Prices and quantities at which transactions done
Settlement day
Purchase turnover
Sales turnover
Total receipts
Total payments
Other debits
Other credits
Cheque cancellation
Balance brought forward
Settlement balance
The statement of accounts gives you an overview of your portfolio. You could check if your investment advisor has done transactions without your consent, if the payments made are entered and also monitor the interest charged on shares purchased on credit.
CDS statements
A monthly and/or quarterly statement including the status of the account (purchases, sales, etc.) is issued to all active account holders (investors) by the CDS at the end of the particular month/calendar quarter. An active account holder is an investor who has carried out at least one transaction during a particular month. An annual statement is issued to inactive
account holders (investors who have not carried out at least one transaction during the year.) However, there should be a balance in their account for the CDS to send the statement. A statement would entail the sections stated below.
Participant (name and address of stockbroker firm you deal with)
Your CDS number given by the respective stockbroker firm
Statement of account
Date transactions took place
Particulars (name of stock)
Debits
Credits
Price at which shares were bought and sold
Balance
Check if the name of the stock, price and quantity purchased are in line with the instructions given by you to the advisor. Verify the details in the statement given by the CSE with the bought/sold notes received by the stockbroker firm. If there are any errors/omissions or other queries regarding these statements, it should be brought to the immediate notice of the CEO/compliance officer of your stockbroker firm.
Price of negligence Common mistakes made by clients
Clients sign the application forms given at the point of opening the account without clearly reading the terms and conditions. At times, they sign blank documents and let the advisor fill in the details. As a result, they, by mistake, sign the Discretionary Account and the advisor trades on his own free will. There is a possibility of the advisor making investment decisions that don’t go in line with the cli- ent’s financial objectives and they might even trade on credit. As a result, the client has to bear the financial burden of paying up the money taken on credit and the interest accumulated.
Clients collect the bought/sold notes and financial statements without reading them. There could be errors in the order. For an example, you could tell your advisor to buy 100 stocks of company Z at Rs.50. He could have by mistake bought 150 shares. In certain instances, the advisor might trade at his own discretion even when you haven’t signed a Discretionary Account. Even if you have given him the authority to trade on your behalf, there are possibilities of making investments that are not suitable for your financial goals. Failure to read these documents in a timely manner will result in you incurring financial losses due to the reasons stated above. Bear in mind that you can’t expect the law to safeguard you if you have not complained within the given time period.
Clients fail to divulge true information in reference to their identity, contact details, financial capacity, etc. Remember that you will be safeguarded by the law only if you have acted according to the stipulated rules and regulations.
Many clients fail to keep copies of the Client Agreement and the Discretionary Account they sign and the financial statements and bought/sold notes they receive. It is important to file these documents as it may be useful if any form of discrepancy occurs. The simple tips given in this article will enable you to be a more vigilant investor and thereby reduce the operational risk involved in an investment.