What is a Contract Note?

Introduction

Trading maintains a competitive global economy because it encourages and promotes the market. The economic concept of buying and selling commodities, which includes  compensation paid to the broker, is trading. Therefore, the ability to do the transactions in trading and documenting them is equally important. A contract note holds strong relevance in the trading segment, and therefore a thorough understanding is a must to read the contract note.

An individual involved in trading practice must be aware of contract note because it consists of several variables of transactions.

This article defines contract notes and explains their importance and how to read them.
 

What is a Contract Note?

A contract note serves as a summary of every transaction a stock broker makes on a trading day. A contract note is one of the most important legal documents available to stock market investors. It verifies a trade made on the client's behalf on the BSE or NSE on a certain day. 

Information regarding the shares you purchased or sold through your broker is included in this paper, which the broker has forwarded to you. Fees and taxes are also mentioned in the contract note. The availability and legality of essential transactional information about  the stock market make it critical for an investor or trader to thoroughly comprehend the market.
 

What makes a Contract Note crucial to you?

As the number of investors in the stock market increases, so do the odds of fraud and conflict. SEBI has taken several initiatives to safeguard the interests of all shareholders. The digital contract note, which indicates the price, brokerage, service tax, and STT in the required format, was one of the first steps in that direction.

An investor can be certain that the order placed through his broker was carried out simply by looking at this document. In case of dispute arising out of transactions, a contract note provides recourse to the arbitrators for settlement. The costs of brokerage, other charges and verification are covered in the notes.
 

What Purpose do Contract Notes Serve?

A contract consists of variables like the quantity of the shares bought, trade price, brokerage fees, services taxes and all the charges levied by the broker. The contract note is  an invoice and denotes the total brokerage fees charged.

It also serves as a detailed bill that can help understand capital gains. A contract note acts as evidence of all the transactions made and therefore can be also used as legal evidence in case of a dispute between the broker and the investor. 

The contract note has various columns that explain all the transactions and fees, along with other details like–

Order & Trade Numbers:
Exchanges assign distinctive numbers to particular Orders and Trades. This column keeps a track of these numbers.

Order Time:
An investor's Order submitted to the Exchange is highlighted in this section.

Trade Time: An investor's trade that was successfully implemented on the exchange is indicated in this column.

For example, let us assume Tata Equity’s price is Rs 3,000 (The last traded price). You placed a Buy order (Limit price) for Rs 2,990 at 11:01:15 am. The order you placed got executed at 11:30:40 am. In this case, the Order time is 11:01:15 am while the trade time is 11:30:40 am.

Securities/Contract Description:
It refers to the name of the stock or contract which was traded under the heading of securities or contract. 
 
Buy/Sell:
It describes the investor's order that is placed

Quantity:
This takes into account how many shares an investor trades in. Orders are indicated by positive numbers, whereas negative numbers represent sell orders.

Gross Rate per Unit:
This rate defines the price at which an investor’s order was completed on the exchange

Brokerage per Unit:
Fees associated with each trade.

Net Rate per Unit:
Because the brokerage fees are separately specified, Net Rate per Unit equals the Gross Rate per Unit.

Closing Rate per Unit:
This rate accounts for the price at which a particular contract closed for the day. It applies exclusively to Derivative Trades

Net Total Before Levies:
This signifies the total amount before any other charges are added.
A positive (+) amount denotes an amount Receivable by You.
A negative (–) amount denotes an amount Payable by You.
 
Exchange:
Information about the Exchange and traded segments is provided in this column.
For Example – NSE-Capital: NSE mentions the Exchange, whereas Capital refers to the Equity Segment

Pay In/Pay Out Obligation:
The sum of the Net Total before Levies (Table 1) and Brokerage fees charged (Table 2) is referred to as Pay In/Pay Out Obligation.

A positive (+) amount denotes the Amount Receivable by You.
A negative (–) amount denotes the Amount Payable by You.

Securities Transaction Tax (STT):
Securities Transaction Tax (STT) is the direct tax levied on every trade made on the Exchange. The broker collects it and pays it to the Exchange. Selling on intraday and F&O transactions and selling on equity delivery, are all subject to STT.
 
Taxable Value of Supply = Total brokerage + Exchange Transaction Charges + SEBI Turnover Fees.

Total Brokerage: 
Total Brokerage is charged as per your Brokerage Plan

Exchange Transaction Charges:
Exchanges like the NSE, BSE, MCX and NCDEX levy fees to facilitate trade. 

SEBI Turnover Fees: 
To control the market, The Securities and Exchange Board of India (SEBI) charges fees on securities transactions. 

CGST – Central GST
SGST – State GST

For a Maharashtra resident, CGST + SGST will be levied. IGST (Inter-state GST)/UGST (Union Territory GST) will be levied for any other part of the country.

Stamp Duty:
The transfer of securities like shares, debentures, futures and options, currency, and other capital assets is subject to a government tax known as stamp duty.

Auction/ Other Charges:
These charges will be imposed on you if applicable.

Net Amount Receivable by Client / (Payable by Client):
The Net Total amount after all levies and charges.
Amount Receivable by You is indicated in positive (+).
Amount Payable by You is indicated in negative (–).

Charges related to DP (Depository Participant Charges), Auto Square-Off, Call-n-Trade, Delayed Payment, MTF interest, or AMC fees – are mentioned in the Ledger Report.

To summarise, it is imperative to understand what is a contract note in the stock market. It provides an overview of the trades made on a particular day. It also sums up their profits and losses. The genuineness of every trading transaction is the contract note's fundamental usage.