Cost Involved in Stock Market Investing

Many young and not so young people are considering investing in stocks as a result of the declining interest rate environment. Bank deposits are no longer appealing due to the low interest rates. This is where an option of stocks comes into consideration. Stocks tend to outperform most other investment options. However, you should be aware of many charges involved with stock market transactions.

What exactly is equity investing?

Equity investment is defined as any investment made to purchase shares of a company. Simply put, this is the money spent on purchasing shares of a company that are exchanged on a recognised stock exchange. In general, equity shares are purchased in the aim of realising long-term financial gains and earning dividends throughout the investment period.

Advantages of Equity Investments

The fundamental source of profit in stock investments is the expected growth in the value of the principal invested, which is known technically as capital gains. If a firm does well, its share price rises. When an investor’s investing horizon exceeds five years, he or she is more likely to realise excellent capital gains.

A firm may opt to distribute profits to its shareholders in the form of dividends. Dividends are paid only once the company has a significant surplus of money after meeting its maintenance costs and covering the costs of its new initiatives and expansions (if any). Large-cap or blue-chip companies are known to pay out dividends on a regular basis.

Is there a fee associated with investing in stock?

When purchasing or selling stocks, an investor must pay a number of fees. Profits earned in the stock market are taxable. Some most common forms of charges include Brokerage fees, stamp duty, securities transaction tax, and other fees.

Brokerage Charges

Broker costs, as the name implies, are the fees paid to the broker for the services they provide to you. Their charge is often a % of the transaction value. For example, if you make a transaction of buying or selling worth Rs 1,000,000, and your broker may charge a 0.3 % commission, then brokerage charges would be equal to Rs 300.

Discount Brokers

Discount brokers provide investors with a trading execution platform in exchange for a commission. They do not, however, provide investment advisory services. On intraday trading and delivery, their fees range from Rs 10 to Rs 20 each trade. However, there are certain budget brokers who do not charge a fee for delivery trading. When purchasing and selling shares, investors must pay brokerage on both sides of the transaction. However, it is not uncommon to come across brokers who only charge a brokerage fee on one end of the transaction, that is, either selling or purchasing. Most discount brokers charge an AMC cost which is paid on an annual basis.

Full-Service Brokerages

These are brokers who offer an all-inclusive trading service that covers trading stocks, currencies, and commodities, as well as related services such as research advisory, sales and asset management, investment banking, and so on. A full-service broker may charge anything from 0.01 % to 0.5 % in brokerage fees for delivery and intraday trading.

Securities Transaction Tax on Share Trading

This fee is levied on both sides of the purchase and selling transaction. The STT is only levied when the stock is sold during intraday trading. For delivery in general, STT is levied at 0.1 percent of the whole transaction on each side of the trade. The fee for intraday STT is approximately 0.025 % of the total transaction on the selling party.

Stamp Duties

This cost is levied on the value of transferred shares, and the rate varies by state because states set and collect stamp duty. It is levied on both the purchasing and selling sides, and it is calculated on the overall turnover value.

Transaction Charges

The stock exchanges levy transaction fees on both parties (Buyer and Seller) of the transaction. The National Stock Exchange charges a transaction fee of 0.00325 %, whereas the Bombay Stock Exchange charges a transaction fee of 0.00275 % on the total amount of the transaction.

Turnover Charges of the Securities and Exchange Board of India (SEBI)

The main market regulator of India’s securities markets charges a fee on both sides of a trading transaction, with a turnover charge of around 0.0002 % of the total amount. The fees are the same for both intraday and delivery share market trading.

Participant Depository Fees

The Central Depository Services Limited and the National Securities Depository Limited, India’s two stock depositories, charge a fixed fee to retain your transactions in electronic form. The depositories do not charge the investors directly, but the depository participants (your Demat account provider or broking company) do. As a result, the depository charges the depository participant, who charges the investors. It is charged on the seller side who sells the stocks in the stock market. They charge a flat fee of around Rs 10 – 20 only from seller of delivery trading, not from intraday. Another point traders must be aware of is the impact of the capital gains tax. There are two types of capital gain tax: Short Term Capital Gain Tax and Long Term Capital Gain Tax.

Short Capital Gain Tax

If your holding duration is less than one year, you will be subject to short-term capital gains tax. It is levied at a flat rate of 15%. In addition, the necessary cess and surcharge are imposed. This rate applies regardless of your income tax bracket.

Long Term Capital Gain Tax

If you sell your shares after a one-year holding period, the capital gains realised are referred to as ‘long-term.’ These gains of up to Rs 1 lakh per year are tax-free. Long-term capital gains of more than Rs 1 lakh are taxed at 10%, and indexation is not permitted.

These are some of the fees that an investor or trader should be aware of when trading stocks. Aside from that, it is critical to remember the risks associated with equities investments. Before investing in the stock market, do your homework and seek professional financial guidance if necessary. There will be no savings on trading fees if you lose money on your investments due to reckless investing.

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

Note – This channel is for educational and training purpose only & any stock mentioned here should not be taken as a tip/recommendation/advice

You may also like: How equity investing is tax efficient for investors?