As a trader, it is essential that you focus on your finances and keep a close eye on where your money is spent. That’s why it is important to know in advance what kind of costs there are behind any successful transaction. So here is a short list of the trading costs that every trader needs to know.
Capital
This is a key term when it comes to the normal costs of trading. Your capital is the amount of money you have, which you will spend on buying stocks. Seems easy, right? Your capital does not need to be very large when you first start out- if you trade in a smart way, it will grow quickly.
Taxation
Whether you want to trade occasionally or constantly taxation should be considered if you want to be realistic about your profit margins. Apart from the usual, easy-to-spot fees, you need to keep in mind that you will have to pay some taxes to your local financial authority based on the trades you do. These taxes can differ depending on the type of trading you are undertaking- for instance, traders can be taxed differently if they handle stocks held less than one year than they are when they handle futures or options.
STT- Securities Transaction Tax
The STT is charged on total turnover (which is made of the cost of each share, multiplied by the number of shares). This is a tax that is payable in India on the value of securities that are transacted. Originally introduced in 2004, the tax sparked some discussions and has been consequently reduced in 2013. The original tax rate was 0.125% for delivery-based equity transactions, and a lower 0.025% on intraday transactions, while for futures and options transactions the rate was set was 0.017%. Nowadays, the revised STT for delivery-based equity trading is 0.1% on the turnover, and for Futures the tax has been lowered to 0.01% on the sell-side only, while the rest of the numbers remained unchanged.
Stamp Duty
The stamp duty is levied on value of the shares transferred. In India this is levied by various states, which is why the rate varies from state to state. In Maharashtra, the stamp duty rate for Cash Market (other than Government Securities) and Derivatives Market Turnover (non-delivery) is 0.002% for non-delivery trade and 0.01% for delivery trade.
Service tax
The service tax is part of the taxation system in India and it focuses on the trading of any goods- and if you are interested in online trading, then this includes your business as well. At the moment all taxable services attract a standard service tax of 12%.
SEBI Turnover fees
SEBI stands for Securities and Exchange Board of India, and they are a legal body that have put in place some rules and regulations – and of course, our favorite, some taxes! – which also include the field of trading. For all sale and purchase transactions in securities other than debt securities the rate of the fee is 0.0002 per cent of the price at which the securities are purchased or sold (Rs.20 per crore), while for All sale and purchase transactions in debt securities the rate is 0.000005 per cent of the price at which the securities are purchased or sold (Rs.5 per crore).
Exchange Transaction Tax
This tax is very straight-forward and easy to remember when it comes to trading, but very important.
For Cash Delivery Trade and Cash Intra-day Trade (each leg) the tax is 0.00325% (or 325 per crore). For Futures Trade (each leg) the tax is 0.0019% (190 per crore) and for Options Trade (but on premium only) it is 0.05% (or 5000 per crore).
Opportunity cost
This is a simple term that defines one of the key concepts in trading. The opportunity cost is the effective price of cost movements that occur before the trade executes.
Turnover charges, commissions, fees
While there are fees and commissions that can vary amongst companies, you should always be on the lookout to make sure you get the most financially-wise deal. This implies a careful analysis- some costs may seem high, but will offer a great deal in return, and be profitable in the long term.
Technology
This last one might come as a surprise, but even if you’re not yet a full-time trader you should take into account all possible costs to make sure you have the financial upper hand at the end of the day. So make sure to factor in your home-office, if you use one for the trading, and all bills that are associated with it. If you use your own analytical software to get ahead on your trades, make sure to keep in mind those costs as well.
The bottom line is that if you want to be successful in the field of trading, you need to keep a very close eye on all financial aspects- what comes in your account is as important as what goes out. Keeping close track of your expenses and making sure your financial records are accurate can help you on a long term, because you can be in absolute control of your money- and your profit!
