capital gains

You landed yourself a job and now want to venture into the world of shares and mutual funds. Maybe even property. Well, what you buy one day, you will end up selling the next, right?

And that means either a capital gain or loss. There is no avoiding it.

Here is to demystifying this tax concept which affects us all.

What is capital gain?

When you sell any asset you own (house, land, shares, mutual fund units, gold, debentures, bonds) and you make a profit on the sale, it is known as capital gain. The tax you pay on this profit is called the capital gains tax.

If you make a loss (you sell at a lower price than you bought it), you incur a capital loss.

What are the types of capital gains?

Depending on how long you held the asset, the capital gain is classified either as short-term or long-term.

Short-term capital gain: If you sell the asset within 36 months from the date of purchase (12 months for shares or mutual funds)

Long-term capital gain: If you sell the asset after 36 months from the date of purchase (12 months for shares or mutual funds)

How is short-term capital gain taxed?

Very simple. A short-term capital gain is added to your total income. Depending on which tax bracket you fall under, you will be taxed.

How is long-term capital gain taxed?

Tax on long-term capital gain (other than shares and mutual fund units), is more complicated. This is because inflation is taken into account. This is good because it reduces the amount of capital gain and the amount you end up paying as tax.

Let's say Mr Mani purchased a house of Rs 2,50,000 (Rs 250,000) on June 20, 1996. He sells it on January 20, 2005, for Rs 4,50,000 (Rs 450,000). Since the house was sold over 36 months after being bought, the capital gain will be long term.

First, you calculate the Cost Inflation Index. These indices are fixed and declared by the Central Government every year (see table below). This is called indexation.

Cost inflation index:
Index of the year it was sold / index of the year it was bought
2004-05 index / 1996-97 index
480/305 = 1.57377

Indexed cost of acquisition
= Buying cost x CII
= 250000 x 1.57377
= 3,93,443

Long term capital gain
= Selling price � Indexed cost
= 4,50,000 � 3,93,443
= Rs 56,547

Tax payable will be 20% of Rs 56,547 ie Rs 11,310. (Plus surcharge of 10% if applicable)

Cost Inflation Index for the various financial years

FY	CII	FY	CII
1981-82	100	1993-94	244
1982-83	109	1994-95	259
1983-84	116	1995-96	281
1984-85	125	1996-97	305
1985-86	133	1997-98	331
1986-87	140	1998-99	351
1987-88	150	1999-00	389
1988-89	161	2000-01	406
1989-90	172	2001-02	426
1990-91	182	2002-03	447
1991-92	199	2003-04	463
1992-93	223	2004-05	480

How is long-term capital gain taxed on shares and mutual funds?

You can pay the tax on long term capital gains on shares and mutual funds either at the rate of 20% or 10%. The choice is yours.

This is how it is done.

Let's say that Mr Mani purchased 4,000 shares on July 27, 2003 and paid Rs 10 per share. He sold them on September 15, 2004 for Rs 12 per share.

Since the investment is held for more than 12 months, the capital gain will be long-term.

If he computes with indexation using the above method, his capital gain will amount to Rs 6,532.

He will have to pay a tax of 20% on Rs 6532, which is Rs 1,306.

If he computes without indexation, this is the way it is done.

Sale proceeds = Rs 48,000 (4,000 shares x Rs 12)
Cost of acquisition = Rs 40,000 (4,000 shares x Rs 10)
Long-term capital gain = Rs 8,000
Tax payable will be 10% on Rs 8,000, which is Rs 800

Has the capital gain calculation not changed in the case of shares?

Yes. From October 1, 2004, if you sell your shares, equity mutual funds and balanced mutual funds which have an equity component of 50% or more, the computation of tax differs.

If you have a short-term capital gain, the tax will be chargeable at 10%.

A long-term capital gain is not taxed.

On the flip side, no longer can you carry forward your long-term capital loss.

Capital loss?

That's right. Sometimes, you do not make a profit. You sell at a higher rate than at what you bought. This is a capital loss. You can then set off this loss against a gain.

~ Long-term capital loss can be set off only against a long-term capital gain.

~ Short-term capital loss can be set off against any type of capital gain, long-term or short-term.

You need not incur the loss and gain in one single year. A long-term capital loss can be carried forward for eight years to be set off against a long-term capital gain.

A short-term capital loss can be set off against any income under the head capital gains (whether short-term or long-term) and can also be carried forward for eight years.

In both cases, these eight years start after the financial year when the loss is incurred.

reason to trade forex

reasons to trade forex

While Forex trading is becoming more popular in the United States, the vast majority of investors still do not understand the massive advantages offered in the foreign currency market when compared to equities or fixed income trading. When you fully grasp the following concepts, you'll understand why you might want to reconsider your current investment strategies.

1. Currency prices are not heavily influenced by institutional investors. In stock trading, there is a limited amount of volume on a daily basis. Each stock has a specific number of shares on the open market and trade prices are governed by the number of people attempting to buy or sell shares at a specific point in time. This makes the market vulnerable to price swings when a large investor is attempting to buy up or unload large amounts of shares. For example, if some pension fund owns 10% of a company and suddenly decides to liquidate their position, the market is now flooded with sell orders. Since the amount of shares attempting to be sold will outnumber the amount of buy orders, the price of the stock will start to drop as the number of buyers days up. This creates losses for the remaining shareholders. On the other hand, the forex market is so massive and has so many investors that no single investor can possibly have a major impact on pricing. There are too many units of Euros, Dollars, Yen, etc for any single institution to hold even close to a controlling interest in any currency.

2. Margin requirements are significantly lower in forex trading than equity trading. While the exact amount of margin allowed is determined by each broker, the restrictions are usually much less stringent when trading forex. Margin allows the investor to "play with house money." In essence, you're borrowing money from the broker to invest in your own account. While this can be risky, it can also be insanely profitable. For example, let's say you have $10,000 of your own money to invest. If you open up a margin account at an equity broker, you can usually margin up to 50% of the value of stock. So if you buy $10,000 in Microsoft stock, you can borrow another $5,000 to own a total of $15,000 in value. With your forex account, the margin requirement is often as low as 1%. Which means that if you buy $10,000 in Euros, you can use your broker's money to buy another $1,000,000. So you now own over $1 million in Euros. Now lets say that the value of each investment increases 10%. Your $15,000 in Microsoft stock is now worth $16,500. You sell it, pay back the $5,000 you borrowed, and you pocket $1,500 in profit (minus any fees or interest). Your return on investment is 15%. If your Euros went up 10%, your $1 million is now worth $1.1 million. After selling and repaying your broker, you profit $100,000 before any interest. That's a return on investment of over 1,000%. Of course, you need to be extra careful when trading on margin. Imagine if the transaction went the other way. You'd be in a much bigger hole in the forex scenario. But the potential for enormous gain is there and is one of the major reasons why forex trading is so attractive to serious investors.

3. Forex trading is open 24 hours a day. Unlike the U.S. stock markets, you can trade forex any time of day from Monday through Friday. If a major news story breaks when you're holding stock, and it's after hours, you're stuck holding onto your position until the market opens the next day. By the time this happens, everyone else knows the news and there's thousands of buy/sell orders waiting when the opening bell rings. This will dramatically influence your trade price and negate any advantage you might have had by being one of the first to react. Keep in mind that many corporations withhold major news such as earnings reports and personnel moves until after the market closes. They do this to minimize emotional trading, which is smart for them to do but also hurts savvy investors. Since Forex trading is open 24 hours, you can place your trade order whenever major events occur.

4. The foreign exchange market is more liquid than the equity market. Forex is the largest market in the world. Every day, an average of $1.4 trillion dollars is traded, and the amount of securities (foreign currencies) is minuscule when compared to the number of companies traded in the equities market. This means that there are always buyers to be matched with sellers, which means that you'll have a much better chance to get a fair and accurate price on your trade than if you were trading a low volume stock where the bid and ask spreads can be very large.

5. Forex trading offers the advantage of limited risk. This is one of the large advantages over the futures market. When you buy a futures contract, you are obligated to buy or sell a specific amount of a specific commodity at a specific time for a specific price. Which means that if disaster hits, you're out of luck. For example, lets say you buy a futures contract to sell corn. If news breaks that reports an outbreak of deaths caused by a pesticide used in corn crops, the price on your contracts will drop through the floor, limits will drop, and you could be stuck in your position and end up taking massive losses. This would not happen in the forex market since you can leave your position at any time.

Elements of a Successful Forex Trade

Elements of a Successful Forex Trade

Courage Under Stressful Conditions When the Outcome is Uncertain

by Jimmy Young of EURUSDTrader

All the foreign exchange trading knowledge in the world is not going to help, unless you have the nerve to buy and sell currencies and put your money at risk. As with the lottery “You gotta be in it to win it”. Trust me when I say that the simple task of hitting the buy or sell key is extremely difficult to do when your own real money is put at risk.

You will feel anxiety, even fear. Here lies the moment of truth. Do you have the courage to be afraid and act anyway? When a fireman runs into a burning building I assume he is afraid but he does it anyway and achieves the desired result. Unless you can overcome or accept your fear and do it anyway, you will not be a successful forex trader.

However, once you learn to control your fear, it gets easier and easier and in time there is no fear. The opposite reaction can become an issue – you’re overconfident and not focused enough on the risk you're taking.

Start by analyzing yourself. Are you the type of person that can control their emotions and flawlessly execute trades, oftentimes under extremely stressful conditions? Are you the type of person who’s overconfident and prone to take more risk than they should? Before your first real trade you need to look inside yourself and get the answers. We believe we can help you correct deficiencies before they result in paralysis (not pulling the trigger) or a huge loss (overconfidence). A huge loss can prematurely end your trading career, or prolong your success until you can raise additional capital.

Both the inability to initiate a trade, or close a losing trade can create serious psychological issues for a trader going forward. By calling attention to these potential stumbling blocks beforehand, you can properly prepare prior to your first real trade and develop good trading habits from day one.

The difficulty doesn’t end with “pulling the trigger”. In fact what comes next is equally or perhaps more difficult. Once you are in the trade the next hurdle is staying in the trade. When trading foreign exchange you exit the trade as soon as possible after entry when it is not working. Most people who have been successful in non-trading ventures find this concept difficult to implement.

For example, real estate tycoons make their fortune riding out the bad times and selling during the boom periods. The problem with trying to adapt a 'hold on until it comes back' strategy in foreign exchange is that most of the time the currencies are in long-term persistent, directional trends and your equity will be wiped out before the currency comes back.

The other side of the coin is staying in a trade that is working. The most common pitfall is closing out a winning position without a valid reason. Once again, fear is the culprit. Your subconscious demons will be scaring you non-stop with questions like “what if news comes out and you wind up with a loss”. The reality is if news comes out in a currency that is going up, the news has a higher probability of being positive than negative (more on why that is so in a later article).

So your fear is just a baseless annoyance. Don’t try and fight the fear. Accept it. Have a laugh about it and then move on to the task at hand, which is determining an exit strategy based on actual price movement. As Garth says in Waynesworld “Live in the now man”. Worrying about what could be is irrational. Studying your chart and determining an objective exit point is reality based and rational.

Another common pitfall is closing a winning position because you are bored with it; its not moving. In Football, after a star running back breaks free for a 50-yard gain, he comes out of the game temporarily for a breather. When he reenters the game he is a serious threat to gain more yards – this is indisputable. So when your position takes a breather after a winning move, the next likely event is further gains – so why close it?

If you can be courageous under fire and strategically patient, foreign exchange trading may be for you. If you’re a natural gunslinger and reckless you will need to tone your act down a notch or two and we can help you make the necessary adjustments. If putting your money at risk makes you a nervous wreck its because you lack the knowledge base to be confident in your decision making.

Patience to Gain Knowledge through Study and Focus

Many new traders believe all you need to profitably trade foreign currencies are charts, technical indicators and a small bankroll. Most of them blow up (lose all their money) within a few weeks or months; some are initially successful and it takes as long as a year before they blow up. A tiny minority with good money management skills, patience, and a market niche go on to be successful traders. Armed with charts, technical indicators, and a small bankroll, the chance of succeeding is probably 500 to 1. It's also good to know how currencies relate to each other. There are tools like the universal currency converter that make it easy to do this for you.

To increase your chances of success to near certainty requires knowledge; acquiring knowledge takes hard work, study, dedication and focus. Compile your knowledge base without taking any shortcuts, thereby assuring a solid foundation to build upon.

How to Avoid Losing Money In FOREX-15 tips

How to Avoid Losing Money In FOREX-15 tips

15 Ways to Avoid Losing Money Trading FOREX, by Jimmy Young

1) Knowledge Deficiency – Most new FOREX traders don’t take the time to learn what drives currency rates (primarily fundamentals). When news or a statement is due out they must close out their positions and sit out the best trading opportunities. They are taught to only trade after the market calms down. So essentially they miss the whole move and then trade the random noise that follows a fundamental price move. Just think for a moment about technically trading the aftermath of a price move; there is no potential.

2) Overtrading - I believe that Currency trading often with tight stops and tiny profit targets will benefit the broker. The desire to “just” make a few hundred dollars a day by locking in tiny profits whenever possible is a losing strategy.

3) Over leveraged - Leverage is a two way street. It can magnify losses as well as gains. Traders should employ a level of leverage that is in-line with their risk tolerance.

4) Relying on Others – Real traders play a lone hand; they make their own decisions and don’t rely on others to make their trading decisions for them; there is no halfway; either trade for yourself or have someone else trade for you.

5) Stop Losses – Putting tight stop losses with retail brokers is a recipe for disaster. When you put on a trade commit to a reasonable stop loss limit that allows your trade a fair chance to develop.

6) Demo Accounts – Broker demo accounts are a shill game of sorts; they’re not as time sensitive as real accounts and therefore give the impression that time sensitive trading systems, such as short-term moving average crossovers can be consistently profitably traded; once you start dealing with real money reality is quick to set in.

7) Trading During Off Hours – Bank FX traders, option traders, and hedge funds have a huge advantage during off hours; they can push the currencies around when no volume is going through and the end game is new traders get fleeced trying to trade signals. There is only one signal during off hours – stay out.

8) Trading a Currency, Not a Pair – Being right about a currency is half a trade; success or failure depends upon being right about the second currency that makes up the pair.

9) No Trading Plan - Make money is not a currency trading plan. A trading plan is a blueprint for trading success; it spells out what you see your edge as being; if you don’t have an edge, you don’t have a plan, and likely you’ll wind up a statistic (part of the 95% of new traders that lose and quit).

10) Trading Against Prevailing Trend – There is a huge difference between buying cheaply on the way down and buying cheaply. What was a low price quickly becomes a high price when you’re trading against the trend.

11) Exiting Trades Poorly – If you put on a trade and it’s not working make sure you exit properly; don’t compound the damage. If you’re in a winning trade don’t talk yourself out of the position because you’re bored or want to relieve stress; stress is a natural part of trading; get use to it.

12) Trading Too Short-term – If you’re profit target is less than 20 points don’t do the trade; the spread you pay to enter the trade makes the odds way against you when you go for these tiny profits.

13) Picking Tops and Bottoms - Looking for bargains works well at the supermarket but not trading foreign exchange; try to trade in the direction the price is going and you’re results will improve.

14) Being Too Smart – The most successful traders I know are high school graduates. They keep it simple and don’t look beyond the obvious; their results are excellent.

15) Not Trading Around News Time – Most of the big moves occur around news time. The volume is high and the moves are real; I believe there is no better time to trade fundamentally or technically than when news is released; this is when the real money adjusts their positions and as a result the prices changes reflect serious currency flow (compared to quiet times when Bank traders rule the market with their customer order flow.

The Top Forex Trading Systems

The Top Forex Trading Systems

There really isn't one best Forex trading system that works for everyone. There are many great Forex trading strategies and Forex trading systems but to say there's only one, would not be true.

Each Forex trading system can be as individual as the person using it. One currency exchange trader will find a trading system that works perfectly for them and another Forex trader won't think it's worth the paper it's printed on. If you know something about trading in the Forex market, you know there are certain times of the day your should trade specific currency pairs to increase your odds of making winning trades. Trading off-hours, using the best Forex trading system could be the difference between winning and losing. Try to stay out of the market during the slow times as well.

Experienced Forex traders know the best times to trade in the Forex market. The best times are between the hours of 2AM and 11AM EST. At 2AM EST the European markets are just starting to open and at 3AM EST the London session starts to begin. At 7AM to 8AM EST the New York session start to come alive. At 8:30AM EST there are many news releases (mostly US ones) that can cause market to move. This is when price can move in a big way. These are the times most Forex trader love and this is where the money is made, and lost. The London session starts to close around 11:00am EST and the Forex market tends to slow down until the Asian market start up again around 7PM EST. Then everything starts all over again for the next day. That's why a good Forex trading system is so important to a Forex trader.

To make the most of a Forex trading system, you need one Forex trading strategy for trading at news times and another one to trade for the other times. A good trading strategy for trading the news is to do your homework beforehand. Know what the key news releases are for the day and find out what the consensus numbers are for each news report. There are many Forex news web sites, so I suggest looking at no less than 3 news sites to make sure the consensus numbers are close to each other. Sometimes Forex news websites get the wrong numbers, so doing your homework early, you will easily know if the consensus numbers are on the mark or not. At news release time, what you are looking for are the numbers with a shock value. Numbers that do not meet expectations but exceed or fall shot of the expected numbers. These are the news events to trade. You want to know beforehand what these shock value numbers are, and take action when they get released.

When news is out of the way for the day or it's a very slow news day, that's when you must have a Forex technical trading system. Forex technical trading is when you use forex charts and price action. Forex chart patterns, trendlines (trendline analysis), Fibonacci (Fibonacci numbers/Fibonacci studies) and a many other Forex trading tools can be used for analysis. Just remember to keep it simple. Do not go crazy with the number of tools you decide to use. I recommend picking two or three and work with them at all times. Give each one at least a months time to decide if it's working for you before you move on to another one. Some folks may find they don't like using Fib retracements for example, while other traders like myself, couldn't imagine trading Forex without them. All Forex traders are different so you need to find the best tools and Forex trading systems that work best for you.

There are lots of fantastic online Forex training web sites available to you today and most are free. You should read all you can about Foreign currency trading before jumping in to it. Forex trading is a great business and like any new profession, it takes a lot of time to learn and do it right. Just take your time and remember to get the best Forex trading system that works for you and stay with it.

how to trade forex

Trading foreign exchange is exciting and potentially very profitable, but there are also significant risk factors. It is crucially important that you fully understand the implications of margin trading and the particular pitfalls and opportunities that foreign exchange trading offers. On these pages, we offer you a brief introduction to the FX markets as well as their participants and some strategies that you can apply. However, if you are ever in doubt about any aspect of a trade, you can always discuss the matter in-depth with one of our dealers. They are available 24 hours a day on the Saxo Bank internet trading system, SaxoTrader.

The benchmark of its service is efficient execution, concise analysis and expertise - all achieved whilst maintaining an attractive and competitive cost structure. Today, Saxo Bank offers one of Europe's premier all-round services for trading in derivative products and foreign exchange. We count amongst our employees numerous dealers and analysts, each of whom has many years experience and a wide and varied knowledge of the markets - gained both in our home countries and in international financial centres. When trading foreign exchange, futures and other derivative products, we offer 24-hour service, extensive daily analysis, individual access to our Research & Analysis department for specific queries, and immediate execution of trades through our international network of banks and brokers. All at a price considerably lower than that which most companies and private investors normally have access to.

The combination of our strong emphasis on customer service, our strategy and trading recommendations, our strategic and individual hedging programmes, along with the availability to our clients of the latest news and information builds a strong case for trading an individual account through Saxo Bank.

Terms of trading are agreed individually depending on the volume of your transactions, but are generally much lower in cost when compared to banks and brokers. Your margin deposit can be cash or government securities, bank guarantees etc. Large corporate or institutional clients may be offered trading facilities on the strength of their balance sheet. The minimum deposit accepted for an individual trading account depends on the account type. Trade confirmations and realtime acount overview are built into SaxoTrader, while further account information can be produced in accordance with your specific requirements.