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Monday, February 9, 2015

The Cost of Trading Stocks in the Philippines with Sample Computations

Below is a sample computation of the trading cost incurred when you buy and sell a stock listed in the Philippine Stock Exchange with your online stock broker. The numbers presented are based on the actual (rate of) brokerage/tax/handling fees as presented by COL Financial Group Inc. Enjoy!

Breakdown of computation assuming you buy and sell EDC:

Stock Ticker: EDC
Company Name: Energy Development Corporation
Number of shares bought/sold: 20,000
Price bought/sold: PHP 5.00*

*The current market price of EDC as of this writing is 8.65, we used 5.00 in our sample computation for demonstration purposes.

Description (Buying)Formula/ComputationBreakdown (PHP)
Number of Shares# of shares bought20,000
Stock Priceprice bought5
Trade ValueStock Price * Number of Shares100,000
Buying Cost 1: Commission0.0025 * Trade Value250
Buying Cost 2: VAT0.12 * Commission30
Buying Cost 3: PSE Trans Fee0.00005 * Trade Value5
Buying Cost 4: SCCP (Clearing Fee)0.0001 * Trade Value10
Total Cost of Buying (TCofB)295
Total Cost of Buying as % of Trade Value0.30%
Description (Selling)Formula/ComputationBreakdown (PHP)
Number of Shares# of shares sold20,000
Stock Priceprice sold5
Trade ValueStock Price * Number of Shares100,000
Selling Cost 1: Commission0.0025 * Trade Value250
Selling Cost 2: VAT0.12 * Commission30
Selling Cost 3: PSE Trans Fee0.00005 * Trade Value5
Selling Cost 4: SCCP (Clearing Fee)0.0001 * Trade Value10
Selling Cost 5: Sales Tax0.005 * Trade Value500
Total Cost of Selling (TCofS)795
Total Cost of Selling as % of Trade Value0.80%
Description (Total Buying and Selling)Formula/ComputationBreakdown (PHP)
Total Cost of Buying AND Selling(TCofB + TCofS)1,090
Total Cost of Buying AND Selling as % of Trade Value(TCofB + TCofS) / Trade Value1.09%*

*Assuming you bought and sold stock EDC at the same price, you will lose 1.09% of your money due to the cost of trading - This is precisely the reason why newbie Traders, or even the experienced Traders should really avoid over-trading. 1.09% may seem a little, but do it 10 times (assuming you bought and sold at the same price) and you've lost 10%, do it 50 times and you've lost 50% - of course I'm simplifying the math, but you get the point. =)

So what can we do to minimize the transactions costs? Bearing in mind that a LOT of small things is actually a LOT.

If you observe carefully, the biggest chunk of all the cost of trading is from the Sales Tax. Almost 50% of your trading (buying/selling) cost is from the Sales Tax and as name implies this only applies when you sell your shares of stocks as seen in the breakdown above.

Hence one of the best strategies to minimize your cost of trading is the Buy-and-Hold strategy, this strategy is a simple strategy to buy strong, fundamentally sound stocks at an attractive price and hold it for as long as the "strong fundamentals" haven't change. This is the investment strategy being implemented by the investment greats such as Warren Buffet, Philip Fisher, John Bogle etc. 

I remember a quote from W. Buffet saying,

 "Our favorite holding period is forever".

If we take Buffet's example to the extreme, buying a very strong, fundamentally sound company and holding it forever, this means Buffet will never have to pay any Sales Tax for the rest of his life! Compare this with a very active trader always getting in and out of a stock, every time he gets in and out - he has to beat that 1.09% hurdle just to break-even and he has to the beat that hurdle on every trade for the rest of his trading career - Just to break-even.

But of course even Buffet himself does not hold ALL of his stocks forever - it's just his ideal scenario. He sells from time to time, but after a pretty long holding period maximizing his cost of trading - of w/c when you check the math, actually makes a lot of sense.

Happy investing.

This is not an investment advice and the author shall not be responsible or liable for any trading or investment decisions made based on this information.
The author hereby expressly disclaims any responsibility for any error or inaccuracy in the information.