The Social Benefits Of Stock Market Speculation

The Government of India, in its Budget, raised taxes on both short-term and long-term capital gains made in the stock market and also raised the securities transaction tax on derivatives transactions.

Social Benefits Of Stock Market Speculation

• The fundamental belief behind the idea of imposing higher taxes on stock market profits is that gains from stock market speculation are akin to gains from gambling.

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• In fact, the Economic Survey released a day prior to the Budget argued that unlike developed countries, a developing country such as India cannot afford to waste its limited savings on stock market speculation.
• Finance Secretary T.V. Somanathan even noted that capital gains could be taxed at higher rates as it is currently the fastest-growing income class.
• Capital gains made in the stock market are somehow seen as easy profits earned by investors without providing any useful service to society.
• Similar disdain is also shown when the owner of a piece of real estate profits from a rise in the price of his or her property – as is evident in the removal of indexation benefits for real estate investors in the recent Budget.
• This is not surprising because many believe that when an investor buys an asset and sells it at a higher price in the future, he does not add any value to society in the process.
• In fact, capital gains are seen as a major reason behind growing inequality and taxing such gains is deemed good for society.
• The truth, however, is very different from this belief

The Issue of ‘Gambling Instincts’

• The Centre says it wants to encourage long-term investing in companies by raising the tax on short-term capital gains.
• But it does not understand that without traders with “gambling instincts”, who regularly buy and sell stocks in the short-term, there would not be sufficient liquidity in the market for many long-term investors to easily sell their stocks.
• Further, a highly liquid market also ensures that the shares of businesses are priced as accurately as possible.
• The efficient pricing of the shares of companies can help ensure that companies with promising prospects are able to raise funds more easily than companies with shaky prospects, thus aiding the efficient allocation of resources.

It is Worse for Derivatives

• Meanwhile, gains that speculators make from derivatives such as futures and options suffer an even worse reputation than the more straightforward capital gains made from trading shares.
• But again, disdain towards derivatives speculation also comes from a lack of understanding of its social benefits.
• Derivatives are contracts that allow investors to buy or sell an underlying asset such as a stock at a predetermined price in the future.

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Conclusion

While taxing capital gains aims to curb speculation, traders and derivatives enhance market liquidity and accurate pricing, crucial for efficient resource allocation and economic growth.