Businessman Investor

Touching base with the rational business psyche of stock market investors

Saturday, August 13, 2011

Conscious About Stock Market Transaction Costs

Stock market transaction costs summarized. The percentage variable cost when transacting in the Philippine stock market are as follows: when buying, this is 0.295% of gross purchase amount; when selling, this is 0.795% of gross sale amount. There's practically no fixed costs.
Realizing you really have to be very conscious with transaction costs since these may eat up supposed estimated capital gains in the stock market, I delved on the specifics of transaction costs. Note: This is only applicable in the Philippine Stock Market, and with my broker CitisecOnline.

I discovered that overall transaction cost, be it on the buy or sell side, essentially, is a variable cost so it doesn't really matter how many trades you make since you're not being penalized by any fixed costs. This is very useful information assuming your intention is to accumulate (buy) consistently for a stock position, or to unload (sell), and you're very wary and afraid of incurring fixed costs every time you make a transaction.

If we dissect the costs for BUYING, we can observe these following fees:
  • Commission Fee = 0.25% of Gross Purchase Amount (No. of Shares X Market Price)
  • Commission Fee Vat = Commission Fee X 12%
  • PSE (Philippine Stock Exchange) Fee = 0.005%
  • SCCP (Securities Clearing Corporation of the Philippines) Fee = 0.01%

And if we simplify this, we can arrive at a factor of 0.295% = (0.25% x 1.12) + 0.005% + 0.01%. This is the effective purchase transaction variable cost.

  • We purchase 100,000 shares of PLDT @ Php 11.75/share.
  • Gross Purchase Amount = Php 1,175,000
  • Purchase Transaction Cost = Php 3,466.25 = Php 1,175,000 x 0.295%

And just to be more to the point, let's say you purchased the 100,000 shares in two trades instead:
  • 1st trade gross purchase amount = 587,500; purchase transaction cost = 1,733.125
  • 2nd trade gross purchase amount = 587,500; purchase transaction cost = 1,733.125
  • Total Purchase Transaction Cost = Php 3,466.25, just the same as the cost of the above single trade

Hence, it doesn’t matter if we purchase the stock in two tranches since there are no fixed costs. They shall still end up with the same purchase transaction cost.

On the other hand, if we dissect the costs for SELLING, it's pretty much the same with the addition of the following variable fee:
  • Sales Tax = 0.5%

Hence, effective sale transaction variable cost is 0.795%

  • We sell the 100,000 shares of PLDT @ Php Php 12/share.
  • Gross Sale Amount = Php 1,200,000
  • Sale Transaction Cost = Php 9,540.00 = Php 1,200,000 x 0.795%

All statements above are true assuming:
  • You made the trade with CitisecOnline (I'm not familiar what other brokers charge other than their commission, maybe the same, maybe more, maybe less)
  • You do not transfer the stocks to your name; that would incur an additional fixed cost of Php 112 (inclusive of VAT)
  • Your gross purchase/sale amount (no. of shares X market price) is Php 8,000 or above—CitisecOnline charges 0.25% of gross amount for broker's commission OR a minimum of Php 20, whichever is higher.

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The information presented here is for educational purposes only. Under no circumstances should it be construed as a recommendation to buy, sell, or hold any stocks. If you choose to use this information, you do so at your own risk.

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