UK Stock Market News

There are four ways by which you earn returns through equities – dividend, bonus, rights and capital appreciation. Further, there are various costs associated with equity investing – brokerage, STT, service tax, turnover tax and stamp duty… To arrive at the true returns that your investment has generated you will have to account for all of the above stated corporate actions and costs. You can take the following steps:

Step 1: Arrive at the total purchase cost
When you purchase your shares, you must make a note of the cost of the shares and the number of shares that you have purchased. You must add to this amount the Securities Transaction Tax (STT), stamp duty, service tax, turnover tax and brokerage that is paid on these shares and stock. Suppose you buy 100 shares of ABC Limited at a cost of Rs. 10000. Apart from this cost, you will have to pay brokerage. If brokerage rate is 0.5%, it will work out to be Rs. 50. STT at the rate of 0.125%, will work out to be Rs. 12.50, stamp duty and turnover tax will work out to be Rs. 0.25 and 0.35 respectively. Service tax on brokerage will amount to Rs. 6.18. Thus for arriving at your total cost, all these elements will be added up.
Your total acquisition cost will hence be Rs 10069.28 and per share cost Rs. 100.69.

Step 2: Account for all the corporate actions
While holding on to shares, you may receive:

a. Dividend
Dividends are tax free in the hands of the investor and accordingly, you must consider the whole amount as part of your returns. Suppose the company declares a dividend at the rate of 20%. The total amount to be received by you will work out to be Rs. 200 (assuming the face value of each share bought by you is Rs. 10). Here 200=100×10x20/100.

b. Bonus shares
Since bonus shares attract no purchase cost, post bonus, your holding will increase without any increase in the corresponding purchase cost. You are holding 100 shares of Company ABC. The company issues a bonus of 1:2. This means that for every two shares that you hold, you are allotted one bonus share. This means that post bonus, your holding will rise to 150 shares (100 original shares + 50 bonus shares)…
Now, assume that your purchase cost was Rs 10,000 for the original 100 shares. Post the bonus your holding has risen to 150 shares. However, your purchase cost remains the same i.e. Rs 10,000. Therefore, your cost of purchase per share from the earlier Rs 100 (Rs 10,000 / 100 shares) stands reduced to Rs 67 (Rs 10,000 / 150 shares).

c. Rights
Since rights, give you an option to buy additional shares of the company at a price lower than the market price, subscribing to rights will allow you increase your holding with a limited increase in the purchase cost. You hold 100 shares of Company ABC and the current market price of each share is Rs 150. The company announces a rights issue of 1:5 at Rs 60. This means that for every 5 shares that you hold you are entitled to receive one share and you will have to pay the discounted price of Rs 80 per share. Since you hold 100 shares, if you opt for the rights you will receive 20 shares (1 x 100/5) at a total cost of Rs 1200 (Rs 60 x 20 shares). If the acquisition cost of original 100 shares was Rs. 10000, your total cost of 120 shares will be Rs. 11200 and cost per share will reduce to Rs. 93.33.

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