11.2 Costs in trading

WHAT ARE THE VARIOUS COSTS INVOLVED IN STOCK TRADING ?

We have discussed certain requirements for starting the trading procedures. So now let us also look at the cost involved.

These include:

  1. Account opening and operating charges for trading and demat accounts
  2. Brokerage and commission
  3. Taxes and stamp duty: Securities Turnover Tax (STT)and Service tax (ST)
  4. Statutory costs

Account Opening Charges:

Both stock brokers and banks (which are also stock brokers) offer integrated trading and demat accounts for which they levy integrated charges. The split of account opening charges would be as follows:

Trading Account: Brokers offer free trading accounts but some brokers do charge for the cost of trading applications and some brokers charge for maintaining the trading account which is integrated with demat charges. If an investor wants to trade online, the broker would charge for the software provided and annual maintenance charges. These are customized differently from one broker to another. Therefore you must compare the services and charges levied before opening a trading account.

Demat Account: These would include

a)Initial Charges: Most of the depositories offer free account opening charges for a period of time.

b)Annual Charges: These charges are for maintaining the account and charged on a Yearly, quarterly or monthly basis. These charges may range from Rs 100 to Rs 1,000.

c) Transaction Charges: For every credit and debit of the securities to the demat account the depository levies transaction charges which are based on the number of securities or number of companies traded. Some depositories charge for debit and credit separately and most of the other depositories charge at the time of debit only.

 

Brokerage or Commission:

 

Brokerage differs from intra-day trading to delivery-based trading. Let us understand the difference between these two as they reflect trading and investing in stocks. Trading usually refers to day trading or speculation where the trader buys and sells (square-off) the stocks on the same day. The difference between the buy price and sell price or sell price and buy price is the profit or loss for the trader. Delivery based trading involves buying shares on a market day and selling them only after receiving the delivery of those shares in demat account. Brokerage is the prime cost of trading or investing in shares. This is customised from one trader to another or is fixed. The cost of trading in the form of brokerage is of different forms for example:

Brokerage for Intra-Day Trading:

It ranges between 0.03 per cent or 3 paise and 0.05 percent or 5 paise per Rs 100 on an average. Since it does not involve transfer of dematerialised form of shares to your account, the brokerage is less.

Brokerage for Delivery:

It ranges between 0.30 percent or 30 paise and 0.50 percent or 50 paise per Rs 100 on an average. However, this charge varies from broker to broker. Delivery means that if you buy a stock today and do not sell it today itself then your stock will be delivered to your DP account. So any trade other than intra-day is a delivery trade.

Taxes And Stamp Duty:

Service Tax (ST) is levied as a percentage on the brokerage or commission charged by the stock broker. It is 12 per cent plus 3 per cent education cess on service tax, thus arriving at effectively 12.36 per cent. Securities Transaction Tax (STT) is the tax levied by the central government based on the level or size of the transaction at the end of the day in the following structure: Speculation - 0.025 per cent on selling price and Delivery - 0.125 per cent on either sell or buy. Stamp duty is imposed according to the respective state government’s legal environment and tax structure. It is 0.006 per cent of the value of trade or Rs 30, whichever is less.

Statutory Costs:

This is the charge levied on the value of trade. It is 0.035 per cent of the value of trade.

Example:

Mr Mahesh bought 1,000 shares of Satyam Computers at the rate of Rs 50 per share. What would be the total cost of buying the stock for Mr Mahesh?

Cost of the stock Rs. 50 x 1000 50,000.00
Brokerage Rs. 50,000 x 0.005 250.00
Service Tax Rs. 250 x 0.1236 30.90
Security Transaction Tax Rs. 50,000 x 0.00125 62.50
Stamp duty Rs. 50,000 x 0.00006 3.00
Statutory Cost Rs. 50,000 x 0.00035 17.50
Total   50, 363.90

Though Mahesh’s investments for buying 1,000 shares were 50,000 he has to pay Rs 363.90 as brokerages, taxes and other charges. Note that the brokerage, service tax and STT are usually indicated separately in the contract note. So once the orders of investors are executed, investors get a contract note within the stipulated time. Usually this could be an electronic contract note. Please remember that you should insist on a contract note from the stock broker.

A contract note should include the following:

  1. Name, address and SEBI registration number of the member broker.
  2. Name of partner / proprietor / authorized signatory.
  3. Dealing office address / telephone number / fax number/ code number of the member given by the exchange.
  4. Unique Identification Number.
  5. Contract number, date of issue of contract note, settlement number and time period for settlement.
  6. Constituent (client) name / code number.
  7. Order number and order time corresponding to the trades.
  8. Trade number and trade time.
  9. Quantity and kind of security bought / sold by the client.
  10. Brokerage and purchase / sale rate are given separately.
  11. Service tax rates and any other charges levied by the broker.
  12. Securities Transaction Tax (STT) as applicable.
  13. Signature of the stock broker / authorized signatory.
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