Are You Getting Rich Or Making Your Broker Richer?

July 23, 2021 | Ganesh Adhikari

Do you know which player never loses money in the share market? Everyone who trades in the stock market loses money at some point. But it’s your broker who makes money whether you take a loss or make a profit. When you have paid the broker’s commission and can make a decent profit, it is time to pay taxes. As they say, good luck always comes with a discount and bad luck arrives with a bonus. Investing comes at a cost. Being able to minimize this unwanted cost is the sign of the champion of the capital market.

According to random walk theory, changes in stock prices are randomly distributed and are independent of each other. Thus, the past trend of the stock price movement cannot be used to predict the future. Based on this theory, Burton Gordon Malkiel, a Princeton University economist in his book, Random walk on Wall Street, suggested that a blindfolded monkey throwing darts at the stocks list could select a portfolio that would do as well as the portfolio selected by the experts.

Many might tend to disagree with the economist. Especially when they have invested so much time analyzing the stocks. But the game is all about probabilities. Probability means there is prediction, not fact. You have as many chances to make a profit as you have to bear a loss. If so, then why do most people lose money than they make a profit? This is because of trying to get rich fast approach, unable to control the emotions of fear and greed, and following the crowd with the fear of missing out (FOMO). Likewise, there are so many professionals/experts in the share market managing a large sum of money and with years of experience. Does an amateur stand a chance against those experts of the stock market? The answer to many such questions is yes.

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Sure-Shot Way To Get Richer: Long-Term Investment

An amateur can do far better than the pros in their own game. The solution is a long-term investment. The power of compounding certainly helps you beat the market. The only secret is to invest for the long term in fundamentally strong or growing companies with dividend capacity.

To prove the theory, An investor who invested in a Standard & Poor’s 500-Stock Index Fund at the start of 1969 would have had a portfolio worth $1,092,489 by April 2018, with the assumption that all dividends were reinvested. A second investor who purchased shares in the average actively managed fund would witness his investment grow to $817,741. This is quite a difference. The first investor was 25 percent ahead of the actively managed fund.

Many might have wondered how did Warren Buffett get so rich? Thanks to the magic of compounding, he had started investing in the share market when he was 11 years old. It is 79 years of investment that has made him 100 billion. There is a saying “Rome was not built in a day.”

The taxes, commissions, and fees may seem very little for a single trade, in bulk, they can chew up most of the profits and your hard-earned money. One cannot keep the profits in their pockets as expected owing to these unavoidable and obligatory processes in the trading of the stocks.

NEPSE Trading Commission and Fees for Equity Shares

S.N.	Transaction Amount	Commission*
1	Rs. 50,000 or less	0.4%
2	Rs. 50,001 to Rs. 500,000	0.37%
3	Rs. 500,001 to Rs. 2,000,000	0.34%
4	Rs. 2,000,001 to Rs. 10,000,000	0.3%
3	Above Rs. 10,000,000	0.27%

* The total commission includes 79.4% broker commission, 20% NEPSE commission, and 0.6% regulatory fee (SEBON)

An additional 0.010% SEBON transaction fee on the transaction amount.

Additional Rs. 25 per stock per transfer day is applicable as DP transaction charge to be paid to DP.

For closed-end funds, mutual funds, corporate bonds/debenture, bonds issued by GoN, NRB, and Government Agencies have different trading commissions and fees.

Similarly, Short-term traders with a holding period of less than a year (365 days) will now be taxed 7.5% on capital gains. On the other hand, long-term investors will be taxed 5% on capital gains.

Also Read:

10 Key Macroeconomic Indicators That Investors Should Look Into Before Investing

25 Golden Rules In Stock Market Investing

How Long-Term Investment Fared In Context Of Nepal?

In the context of NEPSE, if you had invested 1 lakh rupees in Premier Insurance Company Ltd. (PIC) in July 2013, by July 2018 your investment would have been more than 37 lakhs in just five years. Still, some people lost money at some point between 2013 and 2018 who traded PIC stock. Those were the ones who tried to build the castle in the air, aiming to get rich quickly. This is just an example, other many stocks would have also boosted your portfolio if you had invested early and for the long run. Shikhar insurance company (SICL), Chhimek Laghubitta Bittiya Sanstha Limited (CBBL), Nepal Life Insurance Company Limited (NLIC), Muktinath Bikas Bank Ltd. (MNBBL), etc. would also have compounded with an annual return of more than 50% in that period. Warren Buffett also iterates that the perfect timing to sell a good stock is never (unless its fundamentals drastically change). Rather than waiting for the correction in the stock market, if you start investing small and regular in companies with growth potential or fundamentally sound companies.

The easiest and the most potent strategy to pocketing huge profits from the capital market is to follow long-term investment. Here are a few tips for long-term investment:

1. Don’t emphasize the small fluctuations in the market. Stay away from the emotions of fear and greed.

2. Pick a strategy and stick to it. Every investor has a different approach to succeed in the capital market. The secret to having a successful strategy is to have confidence in it and apply it.

3. Don’t chase hot stocks. Never follow the rumors unless it is from a reliable source. Following the crowd will lead to obvious downfall.

4. Overcome the fear of missing out.

5. Invest for the long run but sell a loser stock. Only fundamentally sound and growth stocks should be kept for the long-term.

6. Always invest in what you know.

To sum up, the goal is to aspire to high returns while minimizing tax liabilities.

From The Author:

Identifying Ten Bagger Stocks In Stock Market Of Nepal

6 Major Factors Influencing the Company’s Dividend Policy

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