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Investors beware of: Brokerage and Taxation
You
probably know the concept that all your transactions in the stock market are
done though a "stockbroker". A stockbroker earns a commission on whatever
transaction you make. Suppose you make a transaction of Rs.2000, and the
stockbroker charges you a 3% commission, then you have to pay the stockbroker
Rs.60 (3% of Rs.2000) for the transaction. So your total investment in the
transaction in “not Rs.2000”. The total investment in the transaction is
Rs.2060/-
So after sometime, if the price of the stocks you invested in goes up to Rs.2060
then you have not made any money because the total amount you invested was
Rs.2060/-
What is more, even when you sell the stocks, you have to pay the broker
brokerage of 3%. This means that, when you sell the stocks for Rs.2060, you have
to pay the broker Rs.61.6 so the profit of Rs.60 you made on the transaction is
gone, in fact you actually make a loss of Rs.1.6!!
So in effect even though you made a profit of Rs.60 because your stock price
went up, you have actually made a loss.
If combine this with the fact that inflation reduces the value of money over
time, you are just loosing money if you do not invest wisely without
understanding brokerage and inflation.
Important note about brokerage: Brokers make money on whatever transaction you
make. Whether you buy or sell, brokers will make money. Because brokers
basically make money on transactions. Because of this, brokers tend to encourage
you to trade. They don’t really care about whether you make a profit or loss.
They just care about whether you are trading. The more money you are using for
trading, the more they will make. Because of this, it would be wise to not
blindly follow your brokers advise. The broker will give you “hot tips” etc. not
because they are looking out for you and your profit, but because they are
thinking about their own personal profit!
There is even one more factor that eats into your money. Tax!!!
Please note: We are not in any way encouraging you to not pay tax! We are just
educating you about it.
There is a “short term capital gain tax” in our country. For a short term (less
than one year) you have to pay tax on any capital gain you make though the stock
market trading. How much % tax you have to pay, depends on which "tax bracket"
you fall in.
Just to give you an idea. If I make Rs.100 though a transaction in the stock
market, since I fall in the 33% tax bracket. It have to pay Rs.33 of that to the
government!!
Please note: The government encourages you to be a long term-investor by having
no long term capital gain tax. If you make a capital gain by investing for a
period greater than one year, the you do not have to pay any tax on the money
you make.
Now combine this short term capital gain tax with brokerage and inflation! Think
about it for some time. You will almost make nothing on a small profit gains! If
you want to make money out of the stock market, you must make large profit
gains.
Conclusion: As a general rule, just for the sake of simplicity, your investments
must grow at a minimum rate of 15% per year to stay ahead of inflation, tax and
brokerage!! Remember this when making all your investments.
This concludes our basics of the stock market guide. There is lot more to learn!
And the best way to do it is to start investing! (Don’t invest too much in the
beginning but do start!) Once you have your money in the market, you will start
to understand things a whole lot better! |
