Page 146 - CalcBus_Flipbook

18-10 Securities: Stocks & Bonds CH 18]

best to refer to the city and state in which the investor lives to determine their exposure to
these taxes. Full service brokerage firms may provide a service of withholding tax
Net proceeds: The obligations and forward them to the appropriate tax levying agencies. This occurs at the
amount the seller direction of the investor.
receives following The federal agency charged with monitoring the securities exchange markets is The
the sale of an asset Securities and Exchange Commission. This commission is chartered to monitor sales in the
after all costs and exchanges, interstate commerce, through the mail and online, and assure the investor that
expenses are
deducted from the accurate information is made available to prospective purchasers and guarantee that no
gross proceeds. fraud is practiced through the sale of securities. To defray the Exchange Commissions
expenses, a fee is applied to all sales through any registered exchange.
Net Proceeds From Sale of Stock. Selling stock shares through a broker, the seller
receives the net proceeds from the transaction. The net proceeds are the total value of the
transaction less the sum of the broker’s commission, taxes incurred and any fees levied on
the transaction. What the seller receives may be expressed in the following equation:
Net Proceeds = Total Trade Sales Value — (Commission + Taxes + Fees)
The total trade sales value of each lot of stock is the product of the number of shares in
the lot multiplied by the selling price per share.

Total Trade Sale Value = Number of shares x Selling price per share
Example: Davy Jones placed a market order with his broker to sell 520 shares of stock at
the round lot price of 62.75 per share. He paid the broker's commission of
$711.28 and stock-transfer taxes and fees (SEC Fees) of $26.56. Calculate the
net proceeds on this sale.
Solution algorithm:

$62.75 x 500 = $31,375.00 trade value of 500 shares
62.75 — 0.125 = 62.625 odd lot selling price per share less fee
$62.625 x 20 = $1,252.50 trade value of 20 shares
Total Trade Sale Value ($31,375 + $1,252.50) ....... ............. $32,627.50
Less: Broker's commission ................................ $711.28
SEC Fees (Taxes and fees) ........................ 26.56 737.84
Net Proceeds ......................................................... $31,889.66

Return on Investment — Stock
Businesses are run to create profits for their owners. The owners of a publicly traded
company are the shareholders, and the profits from a company’s business activity are
shared with the owners/shareholders. The profits, when distributed, are received as
dividends and those dividends are evaluated as a return on the investment. The investor
also anticipates selling their stock for a gain. However, the stock could be sold for a loss.
When stock is sold, the difference in the purchase price and the sale price could result in
either a capital gain or a capital loss.

Handling Capital Gain or Loss From Sale of Stock. The capital gain or loss from
the sale of stock is the difference between the sale price and the cost of the stock. If the Net
Proceeds of the sale is greater than the cost, the difference is a positive (+) number and this
is termed a capital gain. When the Net Proceeds of the sale are less than the purchase
price, this difference is a negative (-) number and the loss is termed a capital loss.

Capital gain (+) = Net Proceeds — Total Cost

Capital loss (-) = Net Proceeds — Total Cost

Example: Ralph Shirley worked for the John Deere Company (DE) and owns 1,500
shares of its stock. In his last purchases he acquired 200 shares at $74.73,
plus a commission of $298.92. He recently sold 200 shares at $90.15 less
commission and SEC fees totaling $594.99. Calculate the following: (a) the
total cost, (b) the net proceeds, and (c) the amount of capital gain or loss from
the sale.

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