Costs involved in Equity/ Stock Investing

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08 min read

The falling interest rate regime has made more people look towards investing in equities. Bank deposits are no more attractive as they offer meagre interest. This is where equities score better. However, there are several costs associated with equity investments that you should be aware of.

What is Equity Investing?

The investment made towards the purchase of shares of any company is referred to as equity investment. In simple words, this is the money spent on buying shares of a company traded on a recognised stock exchange. Generally, equity shares are purchased in the hope of realising capital gains in the long run and earn dividends throughout the investment tenure. 

Benefits of Equity Investments

The primary source of profit in equity investments is the probable increase in the value of the principal invested, which is technically referred to as capital gains. The share price of a company increases if it performs well. More often than not, investors realise excellent capital gains when the investment horizon is longer than five years. 

A company may decide to share the profits generated with its shareholders in the form of dividends. The dividends are paid out only after the company is left with considerable surplus money after meeting its maintenance cost and has covered the expenses of its new projects and expansions (if any). Large-cap or blue-chip companies are known to offer dividends at regular intervals. 

Is there any cost involved with investing in equity?

There are several charges that an investor has to bear when buying or selling shares. When you make profits in the stock markets, they may be taxable. Some of the most common forms of cost include brokerage charges, stamp duty, securities transaction tax and other charges.

Brokerage Charges

As the name suggests, broker charges are the fee payable to the broker towards the services they render to you. Generally, their fee is a percentage of the transaction value. For instance, if your transaction amounted to Rs 1,00,000, your broker may charge a commission of 0.3% on that transaction, amounting to Rs 300.

Full-Service Brokers

These are brokers who provide an all-inclusive trading service that includes trading stocks, currency, and commodities and related service of research advisory, management of sales and assets, investment banking, and so on. The charges of a full-service broker could range from anywhere between 0.01% to 0.5% brokerage charges on the delivery and intraday trading.

Discount Brokers

Discount brokers provide investors with an execution platform for trading and charge a commission for their service. They, however, do not offer any investment advisory services. Their charges range between a flat fee of Rs 10 and Rs 20 per trade on intraday trading and delivery. But, you may also come across some discount brokers who do not charge any fee on delivery trading. Investors need to pay brokerage on both sides of the trade, that is when buying and selling shares. But again, it is not entirely uncommon to come across some brokers who charge a brokerage fee only on one end of the transaction, that is, either on selling or buying.

Charges on Share Trading

Securities Transaction tax

This is charged on both sides of the buy and sale transaction. In the case of intraday trading, the STT is only charged when the stock is sold. STT is levied at 0.1% of the total transaction, on each side of trading, for delivery in general. The charges for intraday STT is around 0.025% of the complete transaction on the selling party.   

Stamp Duty

This fee is levied on the value of transferred shares, and this rate differs across states as the states are in charge to set and collect stamp duty. It is charged on both the buying and selling sides, charged on the total turnover amount.

Service Tax

Service charge is levied at 15% of the brokerage charge paid by investors and is the same for delivery and intraday trading.

Transaction Charges

Transaction charges are charged on both sides of trading by the stock exchanges. A transaction fee of 0.00325% of the total amount is charged by the National Stock Exchange, while a transaction fee charged by the Bombay Stock Exchange amounts to 0.00275% of the total amount.

Securities and Exchange Board of India (SEBI) Turnover Charges

The apex market regulator of the securities markets in India charges a fee on both sides of a trading transaction with a turnover charge of about 0.0002% of the total amount. The charges are the same for both intraday and delivery trading.

Depository Participant Charges

The two stock depositories in India, the Central Depository Services Limited and the National Securities Depository Limited charge a fixed sum for keeping your transactions in an electronic form. The depository participants (your Demat account provider or broking company) are charged, while the depositories don’t cost the investors directly. Therefore, the depository charges the depository participant, who, in turn, charge the investors. 

Depository participants charge a flat fee between INR 10 to INR 35 for delivery trading, not for intraday.

Another point traders must be aware of is the impact of the capital gains tax. There are two types of capital gain tax: There are two types of Capital gain Tax:

Short term capital gain tax

Short-term capital gains tax is levied if your holding period does not exceed one year. It is levied at a flat rate of 15%. The applicable cess and surcharge are also levied. This rate is irrespective of the income tax slab you fall under.

When you trade for a short term, a flat 15 percent is charged on the profit as short term capital gain tax.

Long-term capital gain tax

As the name suggests, if you sell your stock after a holding period of one year, the capital gains realised are termed ‘long-term’. These gains of up to Rs 1 lakh a year are made tax-exempt. Any long-term capital gains over Rs 1 lakh are taxed at 10%, and indexation is not allowed. 

These are some of the charges that an investor or trader must keep in mind when trading stock. Besides this, an essential aspect to keep in mind is the risks involved in equity investments. Do your research before participating in the stock market and get expert financial advice if needed. No saving on the trading fee will render results if you lose out on your investments due to careless investing.

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