Stock Market Transaction Costs - What does it cost to buy and sell stocks?

What Are Typical Stock Market Transaction Costs?

Summary: This page discusses some of the typical stock market transaction costs that an investor will need to take into consideration.

These fees include:

Stockbroking fees and commissions

Stamp duty

Capital gains tax

Stockbroking Fees

As every good middleman - or woman - knows, there is a fee to be made in every transaction. And so it is with buying and selling stock market assets.

As with any profession, stock brokers provide different levels of service relative to the requirements and net worth of the individual investor.

With the power of the internet to deliver information at near zero cost, the stockbroking profession has undergone a number of difficult years. It is now possible for most private investors to buy or sell online for very low minimum transaction fees. The larger US brokerages offer trades starting from around US$5. Only as recently as 1995, that would have been unheard of!

For larger investors (those with more money to invest), higher levels of service may be required. Such investors will often pay an annual commission - usually in the region of 1% of assets under management - on top of fees for individual transactions.

Stamp Duty

Stamp duty is tax on investments that is usually charged at purchase by the stockbroker on behalf of the government. It is often charged on other assets as well, typically property purchases.

The idea of stamp duty originates from the wax seal that was once used to authenticate documents. The official seal would come at a price, but that price was worth paying to ensure an asset or certificate really was an asset or certificate. In other words, it was an early way of guaranteeing property rights.

Stamp duty is not charged everywhere around the world. Some nations simply do not charge it at all, while others charge nominal rates of 0.5% or 1%.

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However, there are some countries where property purchases - for example - face a one-off fee of more than 10% of the purchase value. Needless to say, such high rates have the effect of forcing part of the transaction 'under the table' to lower the tax payable. Such actions go against the original idea of protecting property rights and instead create uncertainty where there need be none.

In some cases, stamp duty is either waived or fixed for cross-border stock market transactions. For example, the EU Capital Duty Directive places a limit of 1% on transactions between EU Member States. This directive is aimed at company purchases more than the individual, but the same theory is applied.

What Is Capital Gains Tax?

Please be sure to always take individual advice about taxation. This advice needs to consider your country of residence, employment situation, personal financial situation and a number of other factors.

When making any stock market transaction, an investor needs to consider capital gains tax . A capital gain is the profit made from selling an asset for a price greater than was paid at purchase. If an asset is sold at a loss (after fees and commissions) no capital gain has been made.

Many governments tax gains at lower rates if the asset has been held for a long period of time. This is done to try and discourage speculation in markets. Usually tax rates fall for every year that the asset has been owned. The United Kingdom, for example, uses such a system.

All assets are not created equally in terms of taxation. The type of asset in question can play a role in the rates of tax payable. For instance, profits from collectibles, such as stamps, coins or furniture can be taxed at a different rate to profits from the sale of residential property.

Savvy investors will consult an accountant to help them offset large gains or in advance of the sale of substantial holdings. This preemptive advice can help an investor to structure a sale in the most advantageous way possible.

Many stock market funds are able to sell assets without accruing a capital gain. Such funds are generally large retirement funds, known as collective investments. As gains 'roll up' inside the fund, they are CGT free. Examples of such funds are Stakeholder Pensions and SIPPS in the UK and Roth IRA and 401k accounts in the US.

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Another strategy used by investors to offset capital gains taxes is to sell loss making assets in the same tax year as a profit is banked. This can generally be different types of assets as losses are usually considered to be equal, no matter what the asset may have been.

Capital gains taxes can range from between 0% to 35% in the United States, but is considerably higher in many other countries and as low as zero in others. As might be obvious, the nations that charge zero rates are usually very attractive for asset management companies to be located in!

With such high tax rates, legal (and often illegal as well) avoidance techniques are high priorities for many. We would like to stress that all taxpayers should only use legal methods for tax avoidance. Illegal methods are known as tax evasion and are viewed very dimly by the courts. We recommend that you comply with all applicable legislation to the best of your ability.

When it comes to reporting your transactions, your accountant will need to know the date and the price of the asset at purchase and sale, and any fees and commissions paid as part of the transactions.

It is worth pointing out that capital gains tax may or not be an issue for an individual investor. For example, some figures released in the United Kingdom suggest that 99% of UK residents will never pay CGT (as it is referred to there) in their entire lifetime!