Cost basis

When you invest in stocks listed on the Nigerian Exchange (NGX), the initial amount of money you put into a stock becomes your cost basis. This is the foundation for all future calculations of your profit or loss. For instance, if you bought 1,000 shares of a company at ₦100 each, plus paid some transaction fees, your cost basis would be ₦100,000 plus the fees. This amount is crucial because it helps you determine how much profit or loss you make when you decide to sell the stock. It’s important to note that your cost basis includes any fees you paid to buy the stock but does not consider the fees you pay to sell it.

Let's say you bought 1,000 shares of a company at ₦100 each, making your cost basis ₦100,000. If you later sold half of these shares at ₦120 each, your realised profit for that transaction would be calculated by taking the sale proceeds from the 500 shares (₦60,000) and subtracting your cost basis for those 500 shares, which is half of your total cost basis (₦50,000). This results in a realised profit of ₦10,000. Keep in mind, this calculation helps you understand the financial outcome of your trading activities.

In Nigeria, when you receive dividends from your stock investments, a 10% withholding tax (WHT) is applied. This tax is deducted from the dividend before you receive it, but it doesn’t affect your cost basis. Similarly, when you sell your stocks and make a capital gain, a 10% capital gains tax (CGT) is levied. This tax is calculated based on the profit you made, not on your original cost basis. Understanding these tax implications alongside your cost basis helps you better plan and manage your investment strategy.

When you invest in Treasury bills (T-bills) in Nigeria, the cost basis is simply the amount you initially invested. If the Central Bank of Nigeria (CBN) sets the Monetary Policy Rate (MPR) at 27.50%, this rate affects the return on your investment in T-bills. The cost basis in this case is straightforward because there are no additional fees or commissions like in stock trading. The return you earn is calculated based on this initial amount, making it easier to track your gains.

Why it matters: Understanding your cost basis is crucial for Nigerian retail investors as it forms the basis for calculating your gains or losses when you sell your investments. This knowledge helps you make informed decisions, manage taxes effectively, and track the performance of your investments accurately. By keeping a clear record of your cost basis, you can better navigate the complexities of the Nigerian financial market and optimise your investment strategy.