What is Contract Note? Contract Note Meaning, Components and It's Purpose

Imagine you’ve just purchased stocks in the stock market. A contract note acts as the official confirmation of this transaction, summarising all the trades executed on a particular day. It is a critical document that provides transparency and serves as a legal record of your trading activities. Whether you’re trading online or offline, understanding a contract note in the stock market is essential for every investor.

What Does a Contract Note Meaning?

A contract note in stock market terms represents an official confirmation of trades executed on your behalf. Suppose you purchase shares of company X at ₹100 per share. Your contract note will detail this transaction, including the exact time, quantity, and all associated costs.

Contract note example:

You decide to buy 100 shares of company Y. The contract note you receive won’t just show the purchase price of ₹500 per share, but will break down every aspect of your transaction, from regulatory charges to applicable taxes.

What Purpose Does a Contract Note Serve?

A contract note has multiple purposes:

1. Legal Proof: It acts as official documentation of the trades you executed.
2. Financial Transparency: Breaks down all charges, including brokerage, taxes, and net payable or receivable amounts.
3. Trade Confirmation: Confirms the trades carried out by your broker on your behalf.
4. Capital Gains Reference: Helps calculate capital gains for taxation purposes.

For example, if you bought 100 shares of a company at ₹500 each, the contract note would detail the transaction, including the gross amount, brokerage fees, and taxes.

Key Components of a Contract Note

A contract note is divided into sections, each with specific information about the trade. Let’s break it down:

1. Order Number: A unique identifier for each transaction.
2. Trade Time: The exact time when your order was executed.
3. Security Description: The name and symbol of the stock or asset traded.
4. Buy (B)/Sell (S): Indicates whether you bought or sold the security.
5. Quantity: The number of shares or units traded.
6. Gross Rate/Unit: The price at which the order was executed.
7. Net Amount Before Levies: The total amount before brokerage and taxes.
8. Pay-in/Pay-out Obligation: Shows whether the investor owes money or is due to receive funds.

Why is a Contract Note Important?

A contract note is not just a summary it’s a crucial document for investors:

• Prevents Fraud: By cross-verifying the details, you can ensure there are no discrepancies in your transactions.
• Tax Filing: Serves as proof for filing capital gains taxes accurately.
• Dispute Resolution: Acts as evidence in case of any legal or transactional disputes with your broker.
• Financial Management: Offers a comprehensive view of all trading activities and charges. You can also use a SIP Calculator to estimate your returns and plan your investments more effectively.

How to Understand the Contract Note?

A contract note serves as the official confirmation of all trades executed through your stockbroker on stock exchanges. It is an essential document that outlines the details of your transactions, charges, and obligations in a clear, structured format. These notes are sent to your registered email on the trading day and can also be accessed through your broker’s platform.

Reading a contract note might seem daunting at first, but here’s how to read contract note:

Key Sections of a Contract Note

A contract note is organised into various sections, each providing specific details about the trades and financial obligations:

1. Overview Information

The first page of the contract note displays basic details such as:

• Broker and Client Information: Names, contact details, and identification numbers.
• Trade and Settlement Dates: The dates on which the trade was executed and settled.
• Settlement Number: A unique reference for the transaction.

2. Trade Details

The subsequent pages provide a detailed breakdown of the trades in a tabular format. This includes:

• Segment Information: Equity, derivatives, or other segments in which trades were conducted.
• Security or ISIN (International Security Identification Number): A unique code identifying the traded stock or asset.
• Quantity: The number of shares or units bought or sold.
• Trade Price: The price per unit at which the trade was executed.
• Weighted Average Price (WAP): Calculated separately for buy and sell trades across exchanges, using the formulas:
  • For equity trades: WAP=Total trade value/Total quantity traded
  • For derivatives: WAP=Total contract value/Total quantity traded

3. Obligation Details

The obligation section outlines the financial obligations of the client, including:

• Pay-In/Pay-Out Amount:
  • If the amount is enclosed in brackets, it is payable.
  • If not, it is receivable.
• Brokerage and Taxes: Detailed charges such as brokerage fees, GST, STT, stamp duty, SEBI turnover fees, and exchange transaction taxes. For instance:
  • If the billing address is Karnataka, CGST and SGST are each charged at 9%.
  • For other states, IGST is charged at 18%.
• Net Amount: The final amount payable or receivable by the client after accounting for all charges.

4. Trade Execution Details (Annexure A)

This annexure provides specific details about the trades executed, such as:

• Order Number: The unique identifier for each order.
• Order Time and Trade Time: The timestamps of when the order was placed and executed.
• Security Description: The stock or contract involved in the trade.
• Buy (B)/Sell (S): Indicates the type of transaction.
• Gross Rate and Brokerage per Unit: Shows the execution price and the brokerage charged for each unit.
• Net Total (Before Levies): The total amount payable or receivable before additional charges.

Understanding Specific Changes in Contract Notes

As of August 1, 2024, the format of contract notes has been updated. The changes include:

1. Enhanced Clarity: More structured presentation of trade details and charges.
2. Distinct Segments: Clear segregation of equity and derivative trades.
3. Simplified WAP Calculations: Unified formulas for equity and derivatives trading.

For transactions before August 1, the older format is still applicable, which may vary slightly in layout.

Common Annotations in Contract Notes

• Brackets in Pay-In/Pay-Out: Indicate a payable amount.
• Trade Numbers like ‘111111’ or ‘222222’: Denote exchange-settled trades.
• Delivery-Based Trades: Identified by trade numbers such as ‘333333.’

How to Verify a Contract Note?

Verification ensures the accuracy of your contract note:

1. Cross-Check Trade Details: Match the quantities, prices, and timings with your trading platform records.
2. Confirm Charges: Verify brokerage and statutory levies align with the broker’s fee structure.
3. Use Password Protection: Contract notes are often password-protected for security; ensure you can access them using your registered credentials.

Common Mistakes or Misunderstandings

• Ignoring Hidden Charges: Failing to review brokerage fees or taxes can lead to unexpected costs.
• Overlooking Trade Details: Errors in quantities or trade timings can go unnoticed without careful examination.
• Misinterpreting Pay-in/Pay-out: Confusion over negative values may result in delayed payments.

Electronic vs. Physical Contract Notes

Today, most brokers issue electronic contract notes (ECNs) instead of physical ones. Here’s how they compare:

Conclusion

A contract note is much more than a summary it’s a gateway to understanding your investments better. By providing transparency, ensuring compliance, and serving as legal proof, it plays an indispensable role in the trading ecosystem. Whether you’re a seasoned investor or just starting, always take time to read and verify your contract notes to stay informed and secure.