Understanding trading costs with the help of example

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Understanding trading costs
Suppose, X company's stock is trading at Rs 200 at 10:15 a.m. on NSE. Ram enters into a trade and buys 50 shares of X company. He bought for Rs 10,000 (200 x 50).

Then by afternoon i.e. 2:45 pm, the X company's stock reaches Rs 250 at NSE on same day. Ram again enters into a trade and sells all 50 shares of X company. He sold for Rs 12,500 (250 x 50).

But this buy and sell prices are exclusive of trading costs. So let us calculate his effective cost price and effective sell price, i.e. the buy and sell price including of trading costs.

If the trading charges were as following
Brokerage charge: 0.50%
Security Transaction Tax (STT): 0.125% on Turnover
Service tax: 10.30% on total value of brokerage
Transaction Charge will be NSE - 0.0031% or BSE - 0.0035% on turnover
SEBI turnover charges - 0.0001%

Note: It would be advisable that read the manual provided by the brokerage house to find out the trading costs i.e. brokerage cost, STT, margin cost, etc. The brokerage charges or the minimum-brokerage charge will differ between brokers.

The calculation:

Number of shares bought: 50
Price per share: Rs 200
Cost of buying the shares: Rs (200 x 50) = Rs 10,000
Brokerage charge on buying the shares: Rs (10,000 x 0.50/100) = Rs 50
Service Tax: Rs (50 x 10.30/100) = Rs 5.15
Security Transaction Tax (STT): Rs (10,000 x 0.125/100) = Rs 12.50
Transaction cost by NSE: Rs (10,000 x 0.0031/100) =Rs 0.31
SEBI turnover charges: Rs (10,000 x 0.0001/100) = Rs 0.01
Total trading cost: Rs (50+5.15+12.50+0.31+0.01) = Rs 67.97
Effective purchase of stocks: Rs (10,000+67.97) = 10,067.97

Number of shares sold: 50
Price per share: Rs 250
Selling price of the shares: Rs (250 x 50) = Rs 12,500
Brokerage charge on buying the shares: Rs (12,500 x 0.50/100) = Rs 62.50
Service Tax: Rs (62.50 x 10.30/100) = Rs 6.44
Security Transaction Tax (STT): Rs (12,500 x 0.125/100) = Rs 15.63
Transaction cost by NSE: Rs (12,500 x 0.0031/100) = Rs 0.39
SEBI turnover charges: Rs (12,500 x 0.0001/100) = Rs 0.01
Total trading cost: Rs (62.50+6.44+15.63+0.39+0.01) = Rs 84.96
Effective sale of stocks: Rs (12,500-84.96) = Rs 12,415.04

Returns exclusive of all the trading costs: Rs 2,500
Returns inclusive of all the trading costs (Effective Return): Rs 2,347.07

This was a good deal because there was a good amount of appreciation in the stock, but there can be a chance a stock may not appreciate well and you may not even reach a break-even point due to costs attached with the transaction. Therefore, it is always advisable to calculate the effective cost price and the effective sell price. So that the return values clearly give you an idea on the performance of your portfolio.

OneIndia Money

Read more about: stock tips, tax, bse, nse
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