Something near and dear to every trader’s heart is the cost of transacting. Transaction costs are those irritating things that if left to their own devices will slowly eat away at your performance – this is less of a concern for a long term investor (as there are infrequent transactions) but for the active day trader they become incredibly important.
For me the big thing to work out is what we call the “round trip” is costing you. In essence this is your all in cost to do a trade – including your opening cost as well as your closing cost in order to complete your trade. By calculating the “round trip” you will know by how much the share you are trading must increase in percentage terms before you start making a profit, let’s call this your “break-even” return.
For me as trader I try to keep my round trip at 2% (or less) – anything more starts to eat into my profits, in fact the more frequent my trading activity the tighter this number needs to be. Starting with opening a trade transaction costs at OST are 0.5%, with a minimum charge of R80 + VAT. Now the minimum is important because for smaller value transactions this means that my percentage will be higher – for example R80 on an R10,000 transaction equates to a brokerage of 0.8%. On top of this one needs to factor in a few other bits, including STT (Securities Transfer Tax) that is payable on purchases and is an additional 0.25% that is paid to the taxman as well as some STRATE (settlement charges) a set R11.58 per trade irrespective of size. On top of this there is a small amount set at 0.0007% (not a joke) which is an additional insider trading levy charged by the exchange. All in all, on a trade of R10,000 this will equate to an in price of 1.29%, whilst on a trade of R30,000 it would be 0.69%. Out of interest active day traders will often make use of derivative instruments such as CFDs as it reduces their trading costs because STT is not applicable to them.
Now let’s looks at the closing cost, once again we have the 0.5% with the minimum charge of R80. The big advantage to the closing trade is that there is no STT – so that’s a 0.25% “saving”. But we do still incur the STRATE, VAT on charges as well as the insider trading levy. All in on a R10,000 trade the cost would be 1.05% whilst on a R30,000 one it would be 0.44%.
So if we compare the two a “round-trip” on R10,000 transaction comes in at about 2.6% - a little step if I want to be an active trader in shares, whereas on the R30,000 transactions it comes in around 1.75% comfortably inside my 2% limit for more active trading.