What are the charges when you invest in the stock market?
In this article, we are going to look at the costs in buying or selling shares in publicly-listed companies on the Philippine Stocks Exchange.
What are the charges, fees, and taxes involved in trading stocks in the Philippines?
1. Broker’s commission
This is a specified amount or a percentage of your capital that goes to the stock brokerage company that facilitated and executed your order.
If you choose to go with one of the best online stock brokers in the Philippines, the commission at least ₱20 or 0.25% of the amount that is committed to trading, whichever is higher. On the other hand, expect to pay more if you would opt for human broker-assisted trading.
This fee is only applicable to online trading. But if you’d ask for an assistance from a licensed broker, the fee may be higher.
If you’re interested, here is an article that contains list of stock brokerage firms that allows you to open account online.
2. Value added tax
Another cost is the value added tax or VAT, which is 12% of the broker’s commission. This portion goes to the government. Instead of the cost being absorbed by the broker, it is passed to the investors.
For instance, if the commission is ₱20, then it is ₱2.40.
Let’s say that the capital is ₱100,000, the commission then is ₱250 and the VAT is ₱30 (₱250 * 12%).
3. PSE transaction fee
This is the sum that goes to the Philippine Stock Exchange, the private entity that is the marketplace of equities of publicly-listed companies. It represents 0.005% of the total amount.
4. SCCP fee
The Securities Clearing Corporation of the Philippines is the company that is responsible in making sure that each stock being traded is cleared and settled.
In every trade, the stock is sold and bought. The SCCP ensures that the seller gets paid, and that the buyer is recorded to now own the stock. Thus, it ensures that each transaction has correct corresponding record of the person who purchased the stocks and that the payment is given to the person who gave up the stocks.
Thus, SCCP is paid 0.01% for the trouble.
5. Sales tax
And when an investor sells, a portion of the total trade amount goes to the government in the form of sales tax. The sales tax is 0.60%, and this is paid regardless if the sale resulted to a gain or loss.
Sample computation of fees and charges when buying stocks
So to use the example above, each Jollibee share costs ₱224.60 and the number of shares is 50. The total amount is ₱11,230.00. In the table below, you will see the details of the breakdown when purchasing stocks.
For more details on these trading charges, you can read Cost of stock trading: fees, taxes in Philippines.
|Number of shares||50|
|Gross trade amount||₱224.60 x 50||₱11,230.00|
|Broker’s commission||0.25% of ₱11,230||₱28.08|
|VAT||12% of ₱28.07 (commission)||₱3.37|
|PSE transaction fee||0.005% of ₱11,230||₱0.56|
|SCCP fee||0.01% of ₱11,230||₱1.12|
|Total||₱11,230.00 + ₱33.12||₱11,263.12|
When you are buying, you will have to pay the costs on top the gross trade amount just like what you see on the table above.
Sample computation of fees and charges when selling stocks
But when you are selling, the charges are taken off from the redeemed value of your shares.
So let’s pretend that you are about to sell 50 shares at ₱250. As you can see from table below, the charges of ₱111.88 is taken off from the gross amount of ₱12,500.
|Number of shares||50|
|Gross trade amount||₱250 x 50||₱12,500.00|
|Broker’s commission||0.25% of ₱12,500||₱31.25|
|VAT||12% of ₱28.07 (commission)||₱3.75|
|PSE transaction fee||0.005% of ₱12,500||₱0.63|
|SCCP fee||0.01% of ₱12,500||₱1.25|
|Sales tax||0.6% of ₱12,500||₱75.00|
|Total||₱12,500 – ₱111.88||₱12,388.12|
The total charges of ₱111.88 is taken off from the gross amount of your trade (₱12,500).
And if we compute how much return on investment (ROI), then we get 10.28% [(12,388.13/11,233.12 – 1) x 100%].
Bringing the above fees together will result to the following shorthand way to quickly know the total trading costs. This will only apply to trade amounts equal to or more than ₱8,000.
|VAT (12% of 25%)||0.03%||0.03%|
|PSE transaction fee||0.005%||0.005%|
|Total trading cost||0.295%||0.895%|
Thus, when you are buying you are paying 0.295% on top of your capital. (If we use the previous scenario, 0.295% of ₱11,230 is going to be ₱33.13.) And when you are selling, 0.895% of the redeemed amount goes to settling the fees. (If we use the previous example, then 0.895% of ₱12,500 is ₱111.88.)
How much increase should your share prices get to break even?
The price of your shares must increase by 1.21% to break even.
Let’s look at an example below. Say that you invested 10,000. Your total trade amount would be ₱9,970.50.
And now let’s say that with your trade amount, it’s increased by 1.21%, which is ₱120.64.
|Gain (9,970.50 x 1.21%)||₱120.64|
|Gaining trade amount (9,970.50 + 120.64)||₱10,091.14|
|Charges (sell, 10,091.14 x 0.895%)||₱90.32|
|Redeemed (10,091.14 – 90.32)||₱10,000.83|
As you can see, to break even means getting back the money that you invested. You’re neither losing or gaining (well, in this example you gain only a little bit).
However, in terms of opportunity cost, you’ve lost the chance in earning passive income within the period of time it remains invested in shares whose price didn’t move up or moved up a little just to let you recoup what you put in.
And what happens when you sell at the same price? The math shows that you’d incur a loss of 1.1874% [1 – (1 – 0.295%)*(1 – 0.895%)].
How can you minimize the cost in stock trading?
There are two ways that you lessen the charges that you get in stock trading.
- Invest a starting capital of at least ₱8k
- Avoid availing a human broker.
- Trade less often.
Invest a starting capital of at least ₱8k
When you trade with the minimum of ₱8,000, you’re paying the least to the broker’s commission. Remember that the commission is either ₱20 or 0.25% of the trade amount.
If you go lower than that figure, then you’re paying more to the broker. See the table below.
For more information, you can read PSE board lot and why 8k is the minimum stock investing.
Avoid availing human brokers
You have an option to hire a person certified by the Securities and Exchange Commission to facilitate stock trading.
In the past, it was the only way to purchase or put up securities on sale. Nowadays, brokerage firms have established online platforms where orders are taken electronically.
An SEC-licensed stock broker can help you in having a smooth experience on the exchange. They can even give expert advice to optimize returns.
However, when you do hire one you’d have to pay more.
To minimize cost, you can stick with online stock broker.
Trade less often
When I started investing in stocks, I notice there are more seminars on technical analysis than fundamental analysis. (If this is your first time hearing these terms, you may read what stocks to buy?)
They’re teaching people how to become short-term traders. While of course this is not wrong and could be perfect for people who fit such undertaking, it also means that investors would buy or sell shares more frequently.
And remember that charges are to be paid in each transaction, regardless if it results to a loss or a gain.
Thus, trade less often in order to lessen cost.
There are many investors locally and abroad, such as the likes of Warren Buffett, who hold stocks in the long-term.
Of course they do their due diligence to make sure that they hold only such stocks that can give them considerable gains including dividends within such length of time. (You can read the related article on the best stocks in the Philippines.)
However, take the time to check whether a dormancy fee is charged by your broker, especially when you are holding your stock positions for a long time and no trades are made for years.
Bear in mind, too, that each investor follows different strategies. Others don’t mind paying the charges for as long as they’re able to receive returns/ROI that they’re satisfied with.
At the end of the day, the decision is really up to you.Tags