During a casual conversation, Mr Salty’s friend said that Mr Salty was very clear in teaching him how to buy and sell stocks. Mr Salty was shocked, because what he said was basics. However, his friend said that he could not find such basic information online – most investment gurus were talking about how to make big money and using intermediate to advanced jargons. Therefore, he suggested Mr Salty write a How-to post for dummies like him.
Therefore, the first part of this How-to post will focus on explaining what various terminologies like “lots” and “contra” are, so that anyone who is new to stock trading can start trading without confusion.
Buying and Selling
1 Lot is 100 Stocks
This also means that when you buy 1 lot of Singapore Airlines stock at $6.13, you have to fork out $613, not $6.13.
Yes, this is to get the obvious out of the way. Interestingly, this is something that a beginner will be confused about. This is also to prevent the scenario where you go buy 1000 lots of Singapore Airline stocks, thinking you’re gonna spend that $6130 you just saved up.
Contract Value = Price of Share x Number of Shares
This refers to the Price of Share multiplied by the Number of Shares. Understanding this is important, because we have to pay commission fees and other administrative fees to the brokerage, CDP and SGX. Therefore, when we buy 1 lot of Singapore Airlines stock at $6.13, the Contract Value is $613, but the cash we have to pay to complete this transaction $640.
We also incur these charges when we sell a stock. Therefore, profits from stock trading isn’t simply using the Contract Value of stock at selling minus Contract Value of stock at buying. Mr Salty will elaborate on this concept in a later post.
Contra
Contra is a “state”. Basically, when we buy or sell a stock, we have 3 days to fulfil the transaction. If one buys a stock and sells it before the fulfilment date, he is said to have sold the stock via “contra”. When this happens, he does not pay the administrative fees.
However, this is a highly speculative act. Admittedly, Mr Salty did contra early in his stock trading days. On good times, he made thousands of dollars. On bad days, he also lost thousands of dollars per contra. Over a few years, Mr Salty lost tens of thousands of dollars, which was why he also decided not to engage in Contra any more.
Talk about learning the hard way!
However, it is important to understand this concept of Contra, because a lot of punters will be using it, and also because it is in fact, a state that exists officially and impossible to avoid talking about. There is also a technical transaction called “Force Sell”, which will be explained later.
Fulfilment
Closely related to Contra is Fulfilment. As mentioned earlier, we have 3 days to fulfil a transaction. A transaction is considered closed/fulfilled when payment for the shares is made.
When one sells a stock, the brokerage has 3 days to fulfill the transaction. Except that since the brokerage would have automated all their transactions, the sellers will only receive the money exactly on the 3rd day.
Similarly, buyers must pay for their shares within the 3 days’ window period. In the example of DBS Vickers, a DBS/POSB account holder can just log into their DBS/POSB account and pay for their shares directly inside the account. It can take place any time within the 3 days period and once payment is made, the transaction is considered “fulfilled” and the stock belongs to the buyer.
If a buyer fails to pay for the shares, the brokerage will “Force Sell” the stocks.
Force Sell
Force Sell happens when a buyer fails to pay for the shares he bought within the 3 days Contra period. This means that the brokerage will sell the shares at prevailing price, without the consent of the buyer.
If the share price fell during this period, the brokerage will chase the buyer to make up the difference. If the share price rose, the brokerage will pay the buyer the difference.
Since the Buy transaction was not fulfilled by the buyer, and the selling takes place within the Contra period, Force Sell is actually part of “Contra sale” mentioned above. The buyer actually does not incur administrative charges. However, he is still obligated to pay the brokerage if the Force Sell takes place at a lower price than the Buy Price.
Bid Price
When Mr Salty places an order to buy 1 lot of Singapore Airlines shares at $6.13, his Bid Price is $6.13. It is a “bid” price, because all buyers are essentially bidding for the shares. All the buyers will be ranked by their Bid Prices and the buyer with the highest bid price will have priority to buy stocks.
It should also be viewed as the “price trigger” – the brokerage will only take action when the Share Price is the same or lower than the Bid Price of a Buyer.
Asking Price
Ask Price is the opposite of Bid Price, taken from the perspective of the Seller. When Mr Salty places an order to sell his 1 lot of Singapore Airlines shares at $6.13, his Asking Price is $6.13. A buyer will naturally only buy shares from a seller who has the lowest asking price.
Similarly, all sellers will be ranked according to their Ask Price and the one with the lowest Ask Price will have priority, since a buyer will only be willing to buy shares at the lowest price he can find.
And this is also a “price trigger” – the order to sell will only be triggered when the Share Price is the same or higher than the Ask Price.
Queue
As mentioned, all buyers and sellers are ranked according to their Bid and Ask prices. At the same time, those with the same Bid or Ask prices are queued according to the time they placed their orders.
Therefore, if Mr Salty places an order to sell his 1 lot of Singapore Airlines stock at $6.15, it doesn’t mean he will get to sell his stock when the stock price hits $6.15. Someone may have placed an order with the same Ask Price of $6.15 before Mr Salty, so her shares will be sold first. If, after that transaction, no buyers are willing to pay $6.15, Mr Salty will not get to sell his stock.
At the same time, if someone B has an Ask Price of $6.14, which matches the Bid Price of a buyer at $6.14, their transaction will take place and the share price will fall back to $6.14.
Mr Salty essentially did not manage to sell his shares even though the share price hit $6.15 at one point, because of the queue system.
Partial Fill
As an extension to the explanation above, Mr Salty may have placed an order to sell 10 lots of Singapore Airlines share at $6.15, but there’s only 1 person willing to buy 6 lots at $6.15. So a partial fill of 6 lots takes place.
Organisation and Scheme Names
CDP, SGX and Brokerage
In Singapore, all stock trading takes place in SGX. It is like the marketplace for stocks (err… that’s why it’s called stock market).
CDP is the place where all the stocks in Singapore are held/kept. It doesn’t matter if you bought the stocks – the stocks you bought are still held in CDP. This is like the files you have on your hard disk. No matter which folder you keep them, all the files still exist on the hard disk.
Both CDP and SGX are the only entities of their kind in Singapore. In other words, there is no other place to trade stocks and no other place in Singapore that holds stocks.
The brokerages are the firms that help you fulfil the transactions. It is like the real estate agent that helps you buy and sell your house. They are there because for retail investors like Mr Salty, there are no over avenues for them to trade stocks on SGX, other than using the brokerages. Each brokerage has their own trading platforms and rates for commission. Therefore, before one starts trading in shares, he has to research the brokerages and decide which one to use.
Many brokerages provide “analytics” on their online trading platforms. However, for those who haven’t decided which brokerage to use, you can go to www.sgx.com and still be able to view historical data and critical numbers of companies listed on SGX.
CPFIS
This is totally unique to Singapore. CPFIS refers to the CPF Investment Scheme. When a person has more than $20,000 in his CPF OA, he can invest that amount in excess of $20,000 in stocks (which is also called “investible savings”). However, he can only use up to 35% of his investible savings and only buy stocks that are “pre-approved” by CPF, which are also called CPFIS stocks.
CPFIS stocks are usually blue chips like, you guessed it, Singapore Airlines, ST Engineering, DSB and Singtel. Remember that CPF pays a lower interest rate for CPF OA savings above $20,000. At the same time, CPFIS stocks usually pay a dividend that is higher than the CPF OA rates for savings above $20,000, which therefore makes sense for one to invest their money above $20,000, so that their CPF money can “grow” at a rate higher than the rate provided by CPF.
Since these stocks usually have high stock prices, and we can only invest 35% of our investible savings, one will usually only be able start investing when his CPF OA hits $23,000.
A person must also link his CPF account to his brokerage account before he can start investing his CPF money via his brokerage.
Learn more about CPFIS from CPF’s official website: https://www.cpf.gov.sg/Members/Schemes/schemes/optimising-my-cpf/cpf-investment-schemes
Money Making Strategies
Mr Salty does not intend to teach people how to make big bucks by trading stocks. However, for educational sake, there are still some terms that we should talk about.
Buy Low, Sell High
This is the most common concept of stock trading. People view making profits from trading stocks like a mama shop buying goods and reselling them to customers at a higher price. To a certain extent, this is true. However, unlike mama shops, which acts as a middle man between wholesaler and consumers, a stock trader has little control over the price of the stocks owns.
In fact, companies with stock prices that swings between lows and highs are “dangerous”. Shares that dropped in prices dramatically usually have inherent shortcomings that were finally exposed; if they ever pull through, the recovery will take a few years. Think Hyflux, which has not recovered from its money troubles since end 2017.
Shares that increased in prices dramatically are rare, since companies in the first place do not experience meteorite rise in businesses. There will always be people on stock forums talking about how some stocks will jump – such talks happen everyday for a whole range of stocks, but very few of them really spiked in prices. Therefore, while it’s easy to analyse retrospectively that such price spikes were due to X, Y, Z reasons, it doesn’t mean that companies seeing X, Y, Z indicators happening to them will experience a price spike. Betting on a price spike is really just that – betting. It depends a lot on luck, and perhaps insider trading, which is illegal in the first place.
There’s a term for trading stocks purely based on “Buy Low, Sell High” – Speculation. Speculation did make some people millionaires, but for every millionaire speculator, there are tens of thousands who lost tonnes of money in speculation.
On the other hand, good companies either grow steadily (for those in expansion stage) or brings in consistent incomes (those in cash cow stage). Therefore, the share prices of good companies either grow steadily to beat the inflation rate (i.e. at about 1% – 3% per year), or gives consistent dividends despite their share price remaining the same over a few years.
This is why, there’s another group of people who invest purely for the dividends that companies pay out.
Dividend
This is a very important term, especially for people who invest their money to “beat inflation”. One way a person can make money from stock trading is “Buy Low, Sell High”. Another way a person makes money from the stock market is by earning dividends.
Usually, a company will pay a dividend of about 2% – 3% of the prevailing share price every year, when they make profits. Big, stable companies (loosely referred to Blue Chips, though there is a strict definition for a company to be considered a Blue Chip) can usually bring in profits consistently every year, hence they are also expected to pay dividend every year.
When a person invests in the company, their money will “grow” 2% – 3%, which is better than the bank’s interest rates and keeps up to the inflation rate. Therefore, there are people who invests in stocks to “preserve” the value of their money, via earning dividends.
Insider Trading
As mentioned earlier when Mr Salty talked about “Buy Low, Sell High”, some people make money from stocks from insider trading. This means that they got tips from someone inside a company about impending news announcement and made a transaction on the company’s shares to ride on the expected huge price movement.
Insider trading is illegal and unethical. Therefore, Mr Salty only mentions this for education sake.
Conclusion
Stock trading is a humongous field of its own. And with it comes lots of jargons. Some jargons, like the ones mentioned here, are the basics for one to start trading with less confusion. Others are specific to the various schools of thoughts relating to “how to make big money” in the stock market.
What Mr Salty did here is to cover the basics, because many people online are offering tips on the latter. He just hoped that he could help clear the confusion some people faced when starting out in the stock market.
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