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Difference Between Discount Brokers and Full Service Brokers

Difference Between Discount Brokers and Full Service Brokers
18/05/2020

With increasing digitisation in India, all the sectors across the country have been witnessing a humongous shift and the brokerage industry has been no exception to this. With these changes the retail brokerage business models today can mainly be classified into two types, first are the full service brokers and the second are the discount brokers. Both are quite different in terms of services and features, and choosing between the two purely depends on personal needs and preferences. Finding a right market intermediary or broker is of vital importance to make good returns in the long run. Your broker should very well fit into your investment objectives. Let’s start with understanding why are brokers needed and how are the two types of brokers different from each other.

Getting to the basics, we all know that irrespective of the type, every broker is a registered member of exchanges regulated by the Securities and Exchange Board of India (SEBI). Any transaction in stock market; be it buy or sell, requires a broker’s intervention.

Full-service Brokers:

A full service broker is a traditional broker. These brokers provide advisory and trading facilities in stocks, commodities and currencies. Some of them also offer advisory, research, asset management and retirement planning services. They generally have multiple branches and offices across the country and charge commission in percentage

That is proportional to the total amount of trade clients execute. Clients can generally walk into any of their branches and offices directly. They also allow trading of various financial instruments such as pension plans, forex, mutual funds, bonds, insurances, FDs and IPOs.

With this comprehensive bouquet of services, the cost of the traditional brokers are also much higher, which might end up consuming a huge chunk of your profits. If you closely inspect the extensive services offered by them, you would realise that they do not offer as much value. So a traditional or a full service broker can prove to be a good option for the investors who have good budget and resources to find someone to take care of their investments.

Discount Broker:

A discount broker as the name suggest, offers essential services - like carrying out buy and sell orders at highly competitive rates. These brokers generally use online platforms to offer services, which makes the entire process of trading available at your figure. Apart from benefits like the ability to trade remotely, these days discount brokers like 5paisa are also offering research and advisory services like any other traditional broker, all at the discounted rates. Further, since almost 100% of the business of these brokers is online, the platforms they provide are high-end and work seamlessly. Even discount brokers these days have started offering a plethora of service like investment in Mutual Funds, Gold, and FnO amongst others while promoting the idea of self-investment.

People who are looking at services that offer value for money, prefer trading on the go, want to have access to real-time data, prefer minimum human intervention when it comes to finances would want to go for discount brokers. Though these brokers do not have any or perhaps have minimal offices to walk in, their customer support systems are strong, so you can contact them anytime you need, and that too at the convenience of a call or an email. Further, as the processes are completely automated there is minimal human interference thus reducing the room for error when carrying out the process.

Stock market is one such place that has the potentials to offer inflation-beating returns if you are invested for long term. Before deciding on which type of broker to go for, it is always advisable that an investor should first understand these two options by comparing the services and features, charges, minimum opening balance clauses amongst others.

Factors

Full-Service Brokers

Discount Brokers

Service

Advisory for shares, mutual funds, bonds, currencies, commodities etc

Provides all-in-one trading platform

Brokerage

Average daily brokerage is 0.3%-0.5% per trade

Flat trade fees charged per transaction irrespective of the order value

Presence

Operates through a number of branches

Provides online services

Suitable For

An individual who seek hand-holding along with trading tools

An individual who intends to go for self-investment

Deciding Parameters

a) Brokerage & Other Charges
b) Research Desk
c) Customer Service
d) Leverages Funding

a) Brokerage
b) Services offered
c) Customer Support
d) Call & Trade Facility

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Stimulus Day-5; One Final Push Given to the Stimulus Package

Stimulus Day-5; One Final Push Given to the Stimulus Package
18/05/2020

On 17 May, the Finance Minister, Nirmala Sitharaman laid out the details of the fifth and final tranche of the stimulus package. In terms of allocation, there was little left after the third day announcements. What was really ironic was that the last phase of the Stimulus Package announcement coincided with the extension of lockdown till May 31st in key geographies like Mumbai, Pune, Delhi and Tamil Nadu. These are also the worst affected by the COVID-19 syndrome. What it underlines is that despite the Rs.21 trillion already allocated, an extension of the lockdown means that more allocation may be required in the coming weeks. But let us first look at how the overall Stimulus package of Rs.21,00,000 crore has been spent by the government.

How the overall package has panned out?

As per the statement of Nirmala Sitharaman, the government has directly and indirectly allocated a total sum of Rs.20.97 trillion for the Stimulus Package to be precise. The table below captures the gist of the outlay.

Nature of Spend

Details of the Spend

Amount (Rs. in crore)

First Tranche (Fiscal)

Package for MSMEs, DISCOMS, NBFCs

5,94,550

Second Tranche (Fiscal)

Migrant workers, farmers and tribal

3,10,000

Third Tranche (Fiscal)

Farm infrastructure and agri marketing

1,50,000

Fourth & Fifth Tranche

Structural reforms focus

48,100

 

Stimulus 2.0 outlay

11,02,650

 

Earlier fiscal measures

1,92,800

RBI Measures (Monetary)

OMOs, CRR cuts, TLTRO, LTRO, TLTRO 2.0

8,01,603

 

Grand Stimulus Package (Total)

20,97,053

As can be seen from the above table, the amount of Rs.21 trillion encompasses the fiscal outlays made earlier plus the fiscal outlays announced in the last five days plus the monetary stimulus already done. This does not include the monetary stimulus that could be additionally taken up by the RBI.

Day 5 of the Stimulus – Rounding up the structural issues

The fifth day did not have too much by way of fiscal allocations since most of the allocations had been completed by the end of Day 3. However, the reforms on Day 5 did focus on making life simpler for businesses. Here are some quick takeaways.

  • The finance minister has proposed additional funding of Rs.40,000 crore for the MGNREGS scheme over and above the Budgetary allocation. This is expected to improve jobs and livelihood means in the rural areas.
  • The rapid spread of the COVID-19 pandemic has underlined the urgent need for quality healthcare at a primary level. Government has announced that all districts will have infectious disease hospitals and public health labs at block-level.
  • In a move long called for, the FM has announced that COVID-19 related debt would be excluded from the definition of default under the IBC. Minimum threshold to initiate insolvency raised 100-fold to Rs one crore. No new insolvencies in next one year.
  • Another heavy handed stipulation has been done away with. Violations under the Companies Act will be decriminalised. This will ease the burden on courts and tribunals and put less pressure on the entrepreneur taking on the business risk.
  • In a move that could be of great benefit to companies in the IT, pharma, biotechnology and ecommerce space, companies will now be permitted to directly list securities in foreign jurisdictions before listing locally.
  • All sectors hitherto reserved for PSUs are now open to the private sector and role of PSUs to be limited to only some critical areas. Government will notify strategic areas where 100% private partnership will not be permitted.
  • Considering the financial stress on states, the central government will hike borrowing limit of states from 3% to 5% for FY21. This will give ensure resources of Rs.428,000 crore to states. However, states have only used 14% of the limit authorised to them.
With the lockdown being extended, the stimulus looks more like work-in-progress. It would be interesting to see the overall impact on the fiscal deficit.
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Stimulus Day-4; It is Over to Structural Reforms

Stimulus Day-4; It is Over to Structural Reforms
18/05/2020

The penultimate day of the post-COVID reforms announcements shifted focus to more structural areas. The first 3 days were spent on addressing the pain points of COVID-19 including farm incomes, agricultural infrastructure, NBFCs, MFIs, migrant labourers and MSMEs. With the pain points addressed, the Finance Minister shifted focus on the fourth day to more structural issues pertaining to foreign participation, domestic self reliance, investment in critical sectors etc. if you were to sum up the reforms announced on 16th may, it can be divided into two distinct segments; strengthening the “Make in India” initiative and enhancing foreign investments / private participation. After all, any recovery will now predicate on a delicate balance between foreign investments and local jobs.

A big thrust for Make in India on Day-4

A slew of reforms have been announced to give a boost to the “Make in India” initiative by opening many sectors (hitherto closed) to the private sector.

  • In a major push for reforms, the government will now permit research into setting up of atomic reactors via public-private partnerships (PPP). Being a sensitive sector, this was hitherto closed to private participation. It will be drawn into the start-up ecosystem.
  • Space travel and space research to be opened up to private sector. Planetary exploration and space travel will be opened to the private sector. Private sector can use ISRO facilities to boost skills and private parties can now launch their own satellites.
  • As a means to boost business, the government has allocated Rs.8100 crore for viability funding. This will enhance the quantum of viability gap funding up to 30% of total project cost. This will ensure quick completion of pending projects.
  • Major power tariff policy reforms to encompass consumer rights, promote industry and ensure sustainability of power sector. In addition, as a starting step, the power distribution companies in union territories will be privatised. States will wait for now.
  • India to emerge as global hub for aircraft maintenance, repair, overhaul (MRO). Tax regime for MRO will be rationalised. This will reduce maintenance costs of airlines which can be passed on to fliers. Government to additionally invest in 12 airports.
  • Currently, there are stringent restrictions on the use of air space for civil aviation and only 60% of Indian airspace is freely available. Such restrictions on utilisation of air space will be eased so that civilian flying becomes more efficient.

Enticing foreign investments where they can add value

The second part of the reforms on the fourth day focused on getting foreign capital where warranted.

  • The big takeaway is that coal will no longer be a government monopoly but domestic and foreign private participation will be allowed. Govt will bring in commercial mining in coal sector for the sake of competition and transparency. Domestic and foreign investment will be encouraged through revenue sharing mechanism.
  • Foreign direct investment (FDI) limits in defence manufacturing to be increased from 49% to 74%. Ordnance boards will be listed on stock exchanges as corporate entities. This will go a long way in reducing the defence import bill.
  • Govt will introduce joint auction of bauxite and coal mineral blocks to enhance aluminium industry's competitiveness. Foreign participation will improve mining best practices, improve output and lower costs. In addition, stamp duty on mining leases to be rationalized and distinction between captive and non-captive mines scrapped.
In short, government will create an enabling environment to fast-track investments. This will include fast track investment clearance through an empowered group of secretaries with limited red tape.
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Stimulus Day-3 Puts the Entire thrust on “Jai Kissan”

Jai Kissan
18/05/2020

Friday the 15th of May marked the third consecutive day when Nirmala Sitharaman addressed the press and announced a slew of measures to prepare the Indian economy for growth post COVID-19. Here is how the Stimulus panned out on the first three days of the stimulus roll out.

Day 1 and 2 focused on the building blocks

The first day of the stimulus announcement saw a sharp focus on the financial sector. The government offered leeway to NBFCs, micro finance institutions and housing finance companies. The first day also focused on the beleaguered MSME sector. These medium and small enterprises account for nearly 35% of GDP and over 50% of all exports. MSMEs also account for a bulk of the jobs created in India. However, Day 2 focused on the more vulnerable sections of the economy like the rural population, street vendors and migrant labour. The migrant labourers are an important link in the supply chain for most industries. Their getting back to work is crucial and that is what Day-2 largely focused on.

Day 3 moves its focus to the Indian farmer

COVID-19 and the lockdown had come when Indian agriculture was in a state of flux. The Kharif crop last year had been disappointing but had been more than compensated by the robust Rabi output. However, efforts had been undermined by the lack of proper post harvest infrastructure. Day 3 of the stimulus has focused on improving the condition of the farmer, enhancing rural demand and arresting supply bottlenecks. Here are the key announcements made on Day-3 by the finance minister.

1. Government proposed strict stock limits under exceptional circumstances like national calamities, famines, floods, epidemics etc to smoothen supply flows. This can avoid sharp spikes in price and the consequent impact on inflation.

2. Risk mitigation is the key to protecting farmers from the vagaries of weather and price. A new legal framework will allow farmers to engage with processors, aggregators, large retailers and exporters to ensure fair pricing and risk mitigation.

3. Announced Rs.13,433 crore fund to ensure 100% vaccination of 53 crore livestock in India. The humongous and aggressive vaccination program will go a long way in ensuring the health of cattle and the quality of output.

4. Free pricing has been a long standing demand of farmers. FM announced that cereals, edible oils, oilseeds, pulses, onions and potatoes will be deregulated. The Essential Commodities Act is to be amended for better price realisation.

5. Beekeeping gets official agriculture status with fund allocation of Rs.500 crore. This will enhance income for 2 lakh beekeepers and ensure quality honey supply. The multiplier effect will be an increase in yield with better quality of crops through pollination.

6. A special Rs.100,000 crore fund made available to entrepreneurs and start-ups to facilitate procuring from farmers and add value to the agri-value chain. This fund will be used to create the requisite agri infrastructure with private entrepreneurship.

7. The long standing gap has been post harvest infrastructure. FM has allocated Rs.1 trillion for FPOs for strengthening farm-gate infrastructure such as cold chains, transport, post harvest etc. This will reduce wastage and spoilage of crops.

8. FM allocated Rs.20,000 crore for fishermen through PMMSY Fund. The scheme will lead to additional fish production of 70 lakh tonnes over 5 years. Fisheries and dairy have been two segments that have been less cyclical.

9. Finance Minister also announced a new scheme to give concessional interest loans to dairy cooperatives. Interest subvention scheme will continue and put additional Rs.5000 crore in hands of 2 crore dairy farmers

India is the world’s largest producer of milk, jute and pulses. It is also the second largest producer of sugarcane, cotton, groundnut, fruits, vegetables and fisheries and the third largest producer of cereals. No economic relief package can be complete or meaningful unless it begins with the farmer and that has been the focus on Day-3!

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Yes Bank Sets Off Contagion Selling in the Stock Markets

Yes Bank Sets Off Contagion Selling in the Stock Markets
03/06/2020

The news flows that came from Yes Bank on the morning of 05th March were drastically different from the news flows in late evening. In the morning, the Yes Bank stock rallied by over 25% after it was reported that SBI was expected to come in and support the bank with capital infusion. However, things took a turn when the RBI imposed a moratorium on Yes Bank at 8 pm on 05th March. Under the moratorium order, the Yes Bank board was superseded by an RBI appointed administrator and there were limits of Rs.50,000 withdrawal placed till April 03rd.

Why this move is impacting the stock markets?

Yes Bank is still a part of the Nifty 50 and also a player in the futures segment. The pressure is visible from the fact that as of 10.40 am there are more than 24 crore shares on offer but volumes have been just 1.30 crore shares as there are no buyers even at lower levels. Here is the impact.

  • UBS, a leading brokerage, has pegged the fair value of Yes Bank at around Rs.1, which effectively means it is worth nothing. That explains why there are no buyers in the counter despite the stock being nearly 45% down on 06th March.
  • Most people are worried about the impact that Yes Bank could cause to the markets considering the size of its balance sheet. As of March 2019, Yes Bank had total deposits of Rs.228,000 crore and now all that comes under moratorium. Yes Bank has borrowings of Rs.108,000 crore and that also creates a systemic risk.
  • The next problem could be at a brokerage level. Brokers and other investors who have borrowed against Yes Bank shares could face immediate margin calls. In addition, brokers have already been instructed to close out all outstanding positions in Yes Bank to avoid any market panic.
  • Then there is the collateral damage at two levels. Depositors may be forced to sell out other assets and shares to make up for the deposit locking of Yes Bank. This maybe evident in the next few days. Secondly, borrowers with loan sanctions fromYes Bank may have to look for alternative sources of finance.
  • The moratorium on Yes Bank raises some questions over other private banks that have been facing NPA problems in the past. For example IndusInd Bank, RBL Bank and Bandhan Bank have taken deep cuts in trading on 06th March. Other banks in the midst of a liquidity crunch like Lakshmi Vilas Bank are also on lower circuit.
  • Yes Bank was quite active in funding real estate projects and even NBFCs. Both these sectors will immediately feel the crunch as the funding sources dry up and that could also have a cascading effect. That is also evident in the stock prices.
  • Lastly, don’t forget the retail borrowing effect. As per the RBI announcement, any deposit made by an individual will only be paid after adjusting against the loans outstanding. This could create a major liquidity crunch among retail investors. In fact, the weak consumption that has been a major bugbear for the Indian economy could get worse if the situation is not handled quickly and effectively.

Yes Bank has already lost over 90% of its market value in the last one year and the sharp fall on 06th March only exacerbates the problem. The impact of Yes Bank on the Indian economy is likely to be much deeper than originally anticipated. A lot will depend on how quickly the administrator is able to put the house in order, infuse capital and bring stability back to the markets. The crisis is in the open; it is now about how it is handled!

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Top 5 Options Trading Strategies

Top 5 Options Trading Strategies
03/06/2020

Options strategies combine different stock market positions with a view to managing risk or enhancing returns. Why are options unique? Unlike futures, options are asymmetric. For example, when one person buys futures and another sells futures, the risk of price fluctuation is equal for both. However, in an option the buyer has limited risk and unlimited return potential while the seller has unlimited risk potential and limited returns. This makes options strategies possible. Here are five popular options strategies.

Protective Put strategy

If you bought Reliance Industries at Rs.1485, how do you protect from a price fall. Create a protective put strategy by purchasing a put option of lower strike. So you can buy a 1480 strike put option at Rs.8. A put option is a right to sell and the premium is a sunk cost. If the price goes above Rs.1493 (1485 + 8), you profits are unlimited. On the downside, your maximum loss is cannot exceed Rs.13 {(1485-1480) + 8}. In short, you limit your loss by paying a small premium of Rs.8.

Covered Call strategy

A covered call strategy is normally used when you want to reduce the cost of holding a stock. If you bought SBI at Rs.340 for long term, but the stock falls to Rs.328; what do you do?. You are confident of the long term prospects of SBI, but in the next 3 months you don’t expect the stock to cross Rs.350. You can start by selling the near month 350 call at Rs.20 and repeat for 3 months. Here is how the returns table will look like.

Details

First Month

Second Month

Third Month

SBI 350 call sold at

Rs.20

Rs.21

Rs.20

Position closed at

Rs.5

Rs.25

Rs.4

Net Profit / Loss

Rs.15

Rs.(-5)

Rs.16

You have booked a net profit of Rs.26 on SBI calls in 3 months. At the end of 3 months, your effective cost of holding SBI has come down to Rs.314 (340 – 26). The only risk is if the stock falls sharply, you don’t have protection on the downside. That is where a butterfly comes in.

Butterfly strategy

Butterfly combines a protective put and covered call. Here, the premium received on the higher call sold, reduces the net cost of the put option purchased. This increases chances of profits. Butterfly is a multi-leg transaction, so watch out for transaction costs.

Bull call spread strategy

This option strategy is generally used when you are moderately bullish on a stock. You buy a call option of a lower strike and sell the call option of the same stock of a higher strike. For example, Tata Motors is currently quoting at Rs.153 and you expect the stock to touch Rs.170 at best in March 2020. You can create bull call spread by buying 150 March call option at Rs.12 and selling 170 call option at Rs.5. Your net cost of Rs.7 (12-5) will be the maximum loss on this strategy. Maximum profit on this strategy will be made at Rs.170. Beyond that, whatever you make on the 150 call, you lose on the 170 call. Hence, this strategy should only be used when you are moderately bullish.

Long strangle strategy

Normally, Infosys is very volatile on the day of the results but it has generally been hard to estimate the direction. Here, you can use volatile strategy like a Long Strangle. It entails buying a higher strike call and a lower strike put on the same stock. For example if you are expecting major volatility in Infy next month, you can create a Strangle by buying 820 March call at Rs.12 and also an 800 March put at Rs.16. Total cost of the Strangle and also maximum loss will  be Rs.28 (16+12). You will be profitable above 848 (820+28) or below 772 (800-28). This is a high cost strategy so you must only use it when you are confident of a large move either ways.

Go ahead and make the best of these options strategies. You can manage your risk and your returns better.