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.

If you are starting trading in stock markets, it pays to be aware of certain concepts which are prevalent in common parlance. Let s have a look at a few of these terms and how these may have an impact on your investment decision.

1. AMO (After Market Orders)
Stock Markets are open for normal trading during 09:55 A.M to 03:30 P.M. However it is possible that you may not be able to place your buy or sell order during this period. AMO (After Market Order) facility offered by certain brokerage houses allows you to place your order even after the market closes for the day. These orders can be placed as share market orders, meaning that they will be executed at the best counter bid or ask. These orders can also be placed as limit order within a range of +/-5% of the close price of today. Thus if the close price of the scrip is Rs. 100, you can place AMO anywhere between Rs. 95 to 105. These orders will be placed in the order book of the exchange once the market opens tomorrow and then get executed based on normal price time priority criteria as is the case with other orders.

AMO allows you to place orders based on any event which has taken place after the market closes. Thus instead of waiting for the next morning for market to open, you may place the order today itself, which will get executed tomorrow.

2. Lien
Lien is the security interest created over an asset to secure the payment of a debt or loan. The term lien in securities markets would constitute creating an interest in shares under your ownership so as to secure the repayment of loan granted to you. Thus you can use your investments in shares to obtain loans backed by lien created on investments in favor of lender. Lien is an effective way of raising resources needed by you to meet your financial obligations.

3. Exposure on Cash and Stocks
If you are sitting on cash, you are having an exposure in terms of opportunity cost of gainful employment of such cash. Thus idle cash or cash lying in saving account and earning peanuts is not a good proposition for your finances. On the other hand, if you have invested in shares of a company, you have an exposure to potential fall in value of your investments. You are also subject to liquidity risk, meaning thereby that you will not be able to exit especially if stock and share is thinly traded. Thus you must make a careful assessment of your exposure on cash and stocks.