MyCIMA

Correct turnover for Share trading

Replies : 2

Hi,

I need help with identifying correct TURNOVER AND COST OF SALES for the following situation.

A UK incorporated limited company is trading US shares and CFDs for Index futures. They are day trading and a typical day consists of the following transactions.

{Day trading is a short term trading: shares are bought and sold within a few minutes or within a few days, usually not held for more than a week}

======================================================
TOTAL Cash capital at the start of the day = US$25,000
======================================================

Buying and shortselling stocks listed on US Exchanges
===============================
BUY 400 APPL@ $100/share [market value = US$40,000] [ margin required = 33%=US$13,333]
SELL 400 APPL@ $101/share [ market value = US$40,400]
Profit = +US$400
===============================
ShortSell 300 RIMM@ $80/share [ market value =US$24,000][ margin required = 33% = US$8,000]
Buy back 300 RIMM@ $81/share [market value = US$24,300]
Loss = -US$300
=====================================================

As it is margin trading, they are able to hold stock portforlio its value is higher than their CASH balance held with broker account.

Profit for the day = 400-300 = US$100 [ exclusing commissions and transaction costs]

My question is

What is the TURN OVER AND COST OF SALE FOR the Company for that day?

Turnover = 400 (trading profits)
COS     =(300) (trading losses)
GrossP&L = 100

(in this method, revenue and costs are not matched, they come from different shares, true cost of making $400 profits does not come from $300 loss)

........OR…...

Turnover = 64,400 (APPL sales 40,400+ RIMM sales 24,00)
COS     = 64,300 (APPL purchase 40,000 + RIMM purchase 24,300)
GrossP&L = 100

(in this method, Turnover and COS looks overstated, as the capital is only $25,000)
(if this method is to be used, turnover could go up to tens of millions after a few hundred transactions)


Please help me find the right values.

many thanks,

LeoM

Realised gains

I'm not sure what your wider company activity and P&L format is Leo so can't give a definitive answer but for investment companies it would be normal to show the $100 as realised gains on investments at fair value through profit or loss rather than turnover/ cos/profit (depending on how you are classifying the instruments, although it sounds like they're FVTP&L as held for trading). Assuming you're reporting under UK GAAP, I suggest referring to FRS 26 on financial instruments (or IAS 39 if you're reporting under IFRS). However, and again without giving a definitive answer, your second option is the format I would expect to see in the notes to the financials setting out the makeup of the realised gain/loss amount.

Turnover

Dear Leo,

I think the first method is not correct.

Assume that the day trader makes loss in both the cases (instead of $400 profit, he makes a loss of $400). Does that mean his turnover is zero?

I think the turnover has to be stated at gross level and not at the trading profit / loss level.

We can also draw parallel with a general trader who buys & sells goods. Such a trader relies on credit facilities such as bank finances, suppliers credit, venture capital etc. (after establishing business himself for some period). At that time, eventhough his capital is say $100,000, he achieves a turnover of say $1 million through such credit facilities. In such a case, we do not state his turnover equivalent to gross profits made by him on various commodities. However, the turnover is the actual sales value of all the commodities sold by him. Similarly, in your example, the turnover should be $64,400 and not $400.