subject: The Paradoxical Way of Stock Market Investing [print this page] The Paradoxical Way of Stock Market Investing
The Paradoxical Way of Stock Market Investing
Stock investors (especially value investors) always look for fundamentally sound companies available below their discount price. They are trading at a discount due to some unfavorable short term developments. Buying these companies below their discount prices ensures a handsome return in future. So, buying low and selling high is the mantra for successful stock investing. And MoneyWorks4me.com provides you the MRP & Discount Price for all listed companies.
But there are times when prices of these stocks fall further after you have purchased them (below discount price). So, what will you do?
There are two approaches that can be adopted
A stock investor can buy more at lower price and bring down his average buy price. This approach is followed by big investors sitting on huge cash.
Book losses when the prices are falling and then buy the same share again. Sounds Weird?
The second approach brings us to the "paradoxical ways of stock market investing".Before explaining this concept, let me explain to you the intricacies of capital gain tax.
In Indian stock market, you are exempted from the capital gain tax levied on the profits gained from your market investments, if you have earned them by selling assets after 12 months. However, short term capital gain tax of 15% is levied on profits earned on selling shares within 12 months.
Now let us see how following the second approach will benefit you.
Suppose an investor- Mr. Rakesh has shares of two good companies A & B (1000 shares of each) in his portfolio. Shares of A & B were bought at Rs. 40 and Rs. 50 respectively. Suppose the current stock price of A is Rs 100 & that of B is Rs. 20. So, we are in a situation where we are gaining in one and losing in another.
Mr. Rakesh decides to sell the 1000 shares of company A', making a profit of Rs 60,000 (100X1000 40X1000). If, he is selling the shares within 12 months of its purchase, then he would be paying a capital gain tax of Rs. 9000 (15% of Rs. 6000)
But, he also sells the shares of company B, booking a loss of Rs. 30000 (20x1000 50x 1000). Immediately after this he buys 1000 shares of company B at Rs 20 (considering negligible brokerage and STT charges). So, why are we selling shares of B at a loss?
We must know that under normal circumstances, a loss' is actually a negative capital gain under the Income Tax Act. The capital gain (cumulative) will be calculated only after removing the effect of the loss (Rs 30,000). So, cumulative capital gain from these two transactions would be Rs. 30,000 (Rs 60,000 - Rs 30,000). Earlier he was paying Rs. 9000 as tax, but now he will only pay Rs 4500 as capital gain tax (15% of Rs 30,000).
So, Mr. Raj paid 50% less tax and kept the shares of B' at a low price. So isn't this a win-win situation for him where he pays fewer taxes and keep the share at a low price?
Keep this strategy in mind, and make wiser decisions while investing in the stock market. To learn the art & science of stock investing subscribe to our free weekly newsletter Stock Shastra, an educational initiative by MoneyWorks4me.com
