UK Stock Market News

In the earlier page on how to compute returns on your equity investments, we have thrown light on the first two steps that you should take towards computing the returns. In this page, we will see how to complete the process by taking remaining steps.

Step 3: Selling the shares.
At the time of selling your shares, you have to bear brokerage, Securities Transaction Tax (STT), stamp duty, service tax and turnover tax. This will reduce sale proceeds…
In the above example, suppose you sell 100 shares at Rs. 12000, them again you will have to pay brokerage (Rs. 60), STT (Rs. 15), stamp duty (Rs. 0.30), service tax (Rs. 7.42) and turnover tax (Rs. 0.42). Thus your sale proceeds will be deducted by this amount of Rs. 83.14 and your net proceeds will be Rs. 11916.86.

Step 4: Impact of the holding period.
The gains that you make on your equity and stock investment are termed as ‘capital gains’ and attract tax depending on the investment term… If the investment term is greater than 12 months, the gains are termed as ‘long term capital gains’ and attract no tax. If the investment term is less than 12 months, the gains are termed as ‘short term capital gains’ and attract tax at the rate of 16.995 per cent (inclusive of surcharge and education cess 3 per cent).

Step 5: The tax liability
If the gains are short-term, you will have a tax liability of 16.995 per cent of the gains (inclusive of surcharge and education cess 3 per cent)…

If the gains are long-term, there is no tax liability…
If as per above example, you hold 100 shares for a period more than 12 months, gains made by you i.e. 1847.58 (Rs. 11916.86- 10069.28) will be exempt from tax. If however you sell within 12 months, your short term tax liability will work out to be Rs. 314 (1847.58X16.995/100).

Step 6: Absolute and Annualised returns
Absolute returns are returns wherein the investment term is not taken into account.
It also pays to consider absolute and annualized returns for the purpose of computation of your total returns. Suppose you buy 100 shares of company ABC Limited for Rs. 15000 on January 01, 2008 and sell all your holdings on March 31, 2008 for Rs. 18000. In this case you make a profit of Rs. 3000 on an investment of Rs. 15000. Hence your absolute returns expressed in terms of percentage is 20% (3000”100/15000).

In case of annualised returns, the investment term is taken into account, and then annualised to arrive at the correct picture…
As per the above example, as you have made these returns over a period of just 3 months, your annualized returns are a 80% (3000×100x12/15000×3).

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.