Don't Ignore These Hidden Costs While Trading

Feb 11, 2022

Vijay Bhambwani, Editor, Fast Profits Daily

In this video, I'll cover a very important trading topic that does not get the attention it deserves.

Trading is a business. Many traders either don't know this or don't treat it like one.

Thus they have no control over their costs.

I hope after watching this video, you will have a better understanding of how much it costs you to trade and how you can minimise it.

Hello friends. This is Vijay Bhambwani here. I come back with you to discuss a very critical aspect about trading in the markets.

You see, if you a short term trader, especially a day trader or micro trend trader, a micro trend trader is somebody who doesn't keep trade open for more than 59 minutes and 59 seconds, which means maximum one hour and you're out, irrespective of the outcome, when you're doing this kind of trading, there are certain costs that you need to be very, very aware of.

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Trading is just like any other business and in any business you do, you must know your costs. It is only after you know your costs and your costs are covered that you can make profit. If you are not aware of the cost or if you take your costs lightly, I don't think a trader has any serious chance of being profitable whatsoever.

So supposing you're a guy who's selling these t-shirts in a shop, not only do you know that the cost of this t-shirt is say Rs 100 and therefore you're selling cost has to be Rs 100 plus. But what is the cost for t-shirt of the final monthly electricity bill that you're paying? What about the salaries? What about the tea and coffee expenses that you are incurring in your shop every month? That has to be added per piece to the inventory and all these costs have to be recovered and the t-shirt has to be marked up to include all these fixed and variable costs so that you realise profits.

Similarly, I'm going to talk about two very critical costs for a day trader and one of them is a known but still ignored and the other is possibly unknown and therefore obviously ignored. Although our talked about the second aspect of it bear with me. I am gonna show you graphics on the screen so that you understand the subject better.

The first one I'm talking about is the transaction cost. In the stock market, it is STT securities transaction tax. In the commodities market, it is CTT the commodities transaction tax. Now the more you trade, the more tax you've will incur. A good trader knows that his take home profit, must always be higher than the amount of execution costs and taxes put together.

So what kind of costs and taxes are there?

One, brokerage. Can't do without it. GST on brokerage. Can't do without that either. Then you have a STT. Then you have exchange transaction costs. You have stamp duty which will vary from state to state. You will have SEBI turnover charges which will be uniform are all across the country.

Now these are costs that you have to build in to. But if you observe your contract note, you will see that the heaviest of all these costs is the STT and that my friends can really make break a trader.

At the end of the year when you sick together to file your IT returns and prepare your P&L account for that year, you will realise how much STT you have paid provided you break your bill into six portions, debits and credits, the final one, and all these transaction costs separately. You will get shocked.

So what is the ultimate the point that I'm trying to drive home here? Look at your trade efficiency ratio. All these six costs put together if it is Rs 100, your profit has to be more than Rs 150 or Rs 200. If it is not happening, you don't take those kind of trades because these are costs that can sink you.

I know many traders feel even if they make Rs 500 and the end of the day after incurring execution, trade commission cost, etc of Rs 5,000 it's okay because its intraday profit and therefore free money. Well, be that as it may, it may be partly true, but you're not a very efficient deployer of capital.

Besides, when you trading by the seat of your pants like this, it just takes you one bad trade to knock you out of business. This kind of a trader is eating like an ant and shitting like an elephant, which means you're taking small, small profits home. But whenever you get hit by the market, ultimately we all get hit by the market, in that one bad trade, you will lose this much. So when you're making, you're making this much and when you're losing you're losing this much because you are trading by the seat of your pants. That's not to happen.

Take those high probability trades when you can cover your STT and the other five charges, which I told you about and still take home 50-100% more than all these charges. A good trader keeps of strict eye on his costs.

The second one is something that I have talked to you about many times before in my videos. For those of my friends who've recently subscribed to this YouTube channel, I am going to repeat that here.

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What you are seeing on your screen is a snap quote window. This is traders cockpit. Just like a pilot commands his aircraft from the cockpit using more than 300 controls, at his fingertips, this a snap quote window contains a lot of hidden signals to the trained eye.

For now, in terms of costs, let the left keep in mind the bid and offer spread. What is the bid and offer spread? The difference between the price at which the buyer wants to buy and the price at which the seller wants to sell.

Now, the bid and offer spread is also a cost. Let me explain to you why.

Supposing there is a buyer at 100 there's a seller and 101. If you can't buy at 100 you're forced to buy at 101. So you incurred Re 1 as a jobbing spread or the bid and offer spread. But if you change your mind and you want to sell it back, because it's not a good trade or maybe you're a micro trend trader who's intention it was to trade only for 59 minutes and 59 seconds. The stock has not moved. You want to get out and you trying to sell. You've incurred Re 1 per share. That's a huge amount.

Now there are many contracts in the F&O where the lot size is 3,000, 4,000, 5,000, even 10,000 shares. If you are going to pay a very big bid and offer spread, you'll never make money at the end of the year. What is the solution?

The solution is that you go for those counters where the bid and offer spreads are fine or small. Just like I mentioned to you in the gold video, you go to wholesalers in Zaveri Bazaar, which will ensure that you pay no more than Rs 120-150 per 10 grams of a pure gold that you buy and self, similarly, I want my viewers, I want my friends who are watching the video to basically go for those counters which are highly liquid and the bid and offer spreads and super fine.

If you are going to pay Re 1 of Rs 1.5 or Rs 2 per share, just to get an entry and exit, think of the number of millions of shares you would buy and sell as active trader per annum. That is the kind of leakage that you will have in your profit and loss account, in your trading account at the end of the year.

That doesn't really look very smart to your part to do, right? Do remember that these are two costs that you must always, always keep in control. You see, the STT is something that you can't control. It's a statutory cost by the bid and offer spread is something that you control absolutely, because you can choose to disregard or skip those counters when the spreads are too wide.

Another thing about STT. Many a times, it's happened to me a lot of times I will admit, many a times we enter into a trade in the morning, and the first trade of the day turns out to be a loss making one. Oh my God, that is not a good day. Then you start to fight with the market because I want my money back. I am going to take revenge. Those the emotional decisions where you buy and sell a lot.

Maybe on your screen you might see a profit on the snap quote window but guess what? You've incurred so much in costs, commission, taxes, and execution costs, but you will actually lose money at the end of the day.

So on days that you're losing money if you try to fight the market or fight the flow, and raise your turnover too much, your STT will go up significantly. So when I look at P&L accounts of traders who come to ask me about how they are doing in trades, when I look at their P&L accounts I tell them to give me their TRR, the trade efficiency ratio. What is amount of money that you're paying on an average per trade. And what is the amount of money that should taking home on an average per day?

So when you see that ratio, you know whether that trader is matured or he is basically just are trading in a knee jerk manner. If you control both these costs, my friend, I assure you your trading your P&L account will significantly improve in the very first year itself.

More on this later depending on your feedback. On this optimistic and educating note, I will bid goodbye to you not before reminding you took like on this video if you liked what you saw. Subscribe to my YouTube channel if you haven't already done so. Click on the bell icon to receive instant alerts about fresh videos being put up out here.

In the comments section, good, bad or ugly, I welcome your feedback. It's always welcome. It keeps us going. Help me reach out to fellow like-minded investors and traders by referring my videos to your family and friends. I wish you have a very profitable day. Take care of yourself. We will meet again in my next. Vijay Bhambwani signing off for now. Bye.

Warm regards,


Vijay L Bhambwani
Editor, Fast Profits Daily
Equitymaster Agora Research Private Limited (Research Analyst

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