Five reasons to avoid trading frequently
Churning one’s stock portfolio does not guarantee better returns. It comes with added costs and can result in higher taxes.
High brokerage costs
Influenced by brokers, television experts, friends and family, investors tend to trade their securities too frequently. This may not be necessarily good for them. “Frequent buying and selling only helps a broker make money—not the stockholder. That is why brokers hound investors with stock calls. And these tips do not always go right,” says certified financial planner Steven Fernandes. Each time you trade—buy or sell a stock—you pay a fee to your brokerage house, which is 0.5-0.75% of the transaction value. The more you churn your portfolio, the more money you burn. Also, each buy and sell attracts a transaction fee of around 0.003% levied by the stock exchange. “Buying and selling frequently is for traders, not investors,” says Vishal Dhawan of Plan Ahead Wealth Advisers.
In addition to the brokerage that you need to pay each time you trade, every time a stock goes into or out of your demat account, there is a depository charge levied on you as well. The more often you transact, the higher is your depository expense. Depository charges include the fee levied by the National Securities Depository (NSDL) and the Central Depository Services, and the fee levied by your depository participant (DP)— the financial firm with which you hold your demat account. For instance, NSDL charges a depository fee of `4.50 per stock purchase. The DP charge varies across participants, but is typically a flat fee per sale transaction.
No tax benefits
Stock trading is also not good from a taxplanning perspective. If you buy and sell frequently, you stand to miss out on the tax benefits available to patient investors. If you sell your shares within one year from their purchase, the gains, if any, resulting from the sale of these shares, will be termed as short-term capital gains. They will be taxable in your hands at a flat rate of 15%. On the other hand, stocks held for at least one year, qualify as long-term capital assets. And as there is no long-term capital gains tax on stocks, those who stay invested for at least a year do not have to pay any capital gains tax.
Tax liability can increase
Frequent buying and selling of shares can actually push up your tax liability. Those frequently buying and selling shares run the risk of being characterised as traders. So, the income from such ‘trade / business’ becomes business income, as opposed to income from investments (capital gains). And when investment income is considered business income, it is taxed at the highest slab rate of 30%. “It depends on various factors such as volume of shares bought or sold, frequency of trade, intention behind it and so on. If someone has borrowed funds to trade then that may also be held against him. Even a solitary transaction is likely to be pulled up for being an adventure in the nature of trade,” says Homi Mistry, Tax Partner at Deloitte, Haskins and Sells. This is a subjective matter because the taxman is unlikely to act on small gains, but profits of more than `5 lakh could catch the taxman’s attention, say experts.
No short-cut to more money
You cannot always make money through trading in the short-term. “There is extreme movement of stock prices on a daily basis and, in most cases, stockholders don’t understand the volatility,” says Fernandes. It is also difficult to predict whether stock prices will go up or down as there is no established system or formula to define the movement of prices. Traders function on technical research—stock indices, trends, price movements—whereas investment should primarily be dictated by fundamentals around stocks’ valuations. Also, technical research can be quite complicated, and so retail investors who turn traders, in the hope of making a quick buck, often end up burning their fingers.
Resource[Times of India]