In the conversation Mr Salty had with his friend, he covered more than the basic jargons which were posted earlier. He also covered some basic principles of stock trading, so that one will not go into investing in stocks without knowing what to expect or a plan.
This post is divided into 6 lessons, which will offer a gradual understanding of what “profit” is when trading in stocks, what factors reduce the profits, how we determine the minimum selling price and how we can minimise the negative factors, so that we can maximise the profits.
- Lesson 1: Use Sell Price – Buy Price To Give You An Indication Of The Potential Profit
- Lesson 2: Factor In Administrative Charges To Get The Actual Profit
- Lesson 3: We Incur A Loss Of $65 The Moment We Buy A Stock
- Lesson 4: Assume Commission Charges Of About $65 To Determine The Lowest Sell Price
- Lesson 5: Spend More, On One Stock, At One Go
- Lesson 6: Save $5,000 To Spend On One Stock At One Time
Lesson 1: Use Sell Price – Buy Price To Give You An Indication Of The Potential Profit
This falls under the basic understanding of buying stocks. In fact, this is the basics of anyone trying to make profits from selling something they bought.
Luckily for us, the stock market is not like Carousell where you will have low ballers asking you to sell your stocks to them at a price lower than the market rate. (Though that might happen when we are in a downturn like now).
Since 1 lot is equal to 100 shares, when we buy 1 lot of Singapore Airlines shares at $6.13 and sell it at $7, we are going to get a profit equivalent to ($7 – $6.13) * 100 shares = $83.
Lesson 2: Factor In Administrative Charges To Get The Actual Profit
Just like buying and selling on Carousell, where Carousell charges fees for every transaction, we have to pay fees to 3 parties: CDP (the one holding the shares), SGX (the Singapore stock market) and the Brokerage (the people helping you fulfil the transactions). Find out more about these commonly used terms in the post “How to Buy Stocks in Singapore – Basics for the New Stock Investor”.
Basically, no matter which brokerage you use, the CDP and SGX fees are the same, since it was a standard fee charged by CDP and SGX, which are also the only entities in Singapore.
The brokerage, however, have their own charges. At the same time, since the market in Singapore is so small, most of them have almost identical rates and rate tiers.
In general, for each transaction (whether buying or selling), the following will appear in our “invoice”:
- Minimum Commission Fee (flat amount depending on broker houses)
- Variable Commission (a percentage of Contract Value*)
- SGX settlement instruction fees (flat fee of $0.35)
- SGX Trading Fee (0.0075% of Contract Value)
- Clearing Fee (CDP imposed) (0.0325% of Contract Value)
- GST (charged on fees)
*Contract Value is (Cost of Share * Number of Shares), which is what we pay for / receive from the stock before all the administrative charges.
Since we incur these fees when we buy and when we sell our stocks, our profit isn’t just simply [(Sell Price – Buy Price) * Number of Shares] any more. Instead, we have to factor in the “administrative fees”.
Our profit will therefore become:
[(Sell Price – Buy Price) * Number of Shares] – Administrative Fees
This leads us to the next lesson:
Lesson 3: We Incur A Loss Of $65 The Moment We Buy A Stock
As we mentioned earlier, the brokerage fees and their rate tiers are almost identical. Therefore, we can use the rates of DBS Vickers as an example.
Disregarding whether the fees are charged by the brokerage or by CDP/SGX, there are 2 basic components of the fees: Flat Fees and Variable Fees.
Variable Fees depends on the Contract Value (Price of Shares * Number of Shares), while Flat Fees are, well, independent (to a certain extent, and we will explain this in the next point) of the Contract Value.
Skipping all the crazy maths, up until a certain amount of Contract Value ($8,928.57 for DBS Vickers), the amount of administrative fees per transaction is below $31. To simplify things, when you buy a stock and sell it, assuming the Contract Value is below $9,000 for each transaction, the total administrative fee will be at most $65.
Since our intention to buy stocks is to sell them at a higher price to earn a profit, we will definitely incur these charges totaling $65.
Therefore, it means that the moment we decide to buy a stock, we would already have incurred a loss of $65.
This then leads us to the next lesson:
Lesson 4: Assume Commission Charges Of About $65 To Determine The Lowest Sell Price
Again, disregarding all the “insider tricks” or “insights to making big money in stocks”, there is always one thing we need to make a note of after we buy a stock – the minimum price we will sell the stock.
It’s just like making sure where our breakeven point is when we want to sell stuff on Carousell is. If we can sell it at a higher price, good. If we can’t sell at a higher price due to all sorts of reasons, we always hope to at least sell it at the breakeven price where we can recoup all the cash we put into the business.
The same applies to stock buying.
Since we already know in Lesson 3 that we will incur administrative fees totalling $65 when buying a stock, we can also use that assumption to work out the price we should sell the stock to recoup the money we put into the stock.
Therefore, the Minimum Selling Price will be:
Minimum Selling Price = [(Buying Price * Number of Shares) + $65] / Number of Shares
Lesson 5: Spend More, On One Stock, At One Go
To understand Lesson 5, we must first understand how the tiered commission rate works.
Understanding Minimum Commission
Earlier, we mentioned that $65 works up until a Contract Value of about $9,000. This boils down to how the brokerage tiers their charges.
Technically, DBS Vickers charges a commission of 0.28% for Contract Value below $50,000. However, they also apply a Minimum Commission of $25. This means that for Contract Value below $50,000, they will charge a commission equivalent to $25 or 0.28% of Contract Value, whichever is higher.
In other words, when our Contract Value is below $8,928.57, we have to pay $25 as commission to the brokerage, making that cost independent of the Contract Value.
When the Contract Value is above $8,928.57, the commission is 0.28% of the Contract Value, thus becoming dependent on the Contract Value.
Minimum Commission Is A Big Component When The Contract Value Is Small
The “nicest” thing about SGX is that they allow us to buy stocks in 1 lot of 100 shares. This means that it’s easier for retail players like Mr Salty to buy Singapore Airlines shares.
We can buy 1 lot of Singapore Airlines shares at $6.13 for $613. At the same time, we can also buy 10 lots of the same share at the same price with cash of $6,130.
Both $613 and $6,130 falls below that ceiling of $8,928.57 (for DBS Vickers), where we will have to pay Minimum Commission of $25 for either transaction.
However, $25 of $613 is 4.1% whereas $25 of $6,130 is 0.41%. Using Lesson 4, it means that when we buy 1 lot of Singapore Airlines shares at $6.13, we can only sell it when the share price is above $6.78 to avoid losses, versus $6.195 when we buy 100 lots.
Or, the price must rise by 10.6% when we buy 1 lot before we can sell the shares without making a loss. However, we only need to wait for Singapore Airlines share price to rise by 1.1% when we buy 10 lots of its shares.
Buying 10 Lots At One Go Vs Buying 1 Lot 10 Times
There is this school of thought that says that if we can’t afford that much money to buy stocks, we can always buy a little of one stock over a period of time. In fact, Dollar Cost Averaging says that if we buy into a stock consistently and regularly over a long period of time, we would be in a better off position.
However, using the logic we learned earlier, when we buy 10 lots of Singapore Airlines stocks at $6.13, the fees for that transaction is $29.37. However, when we buy 1 lot of Singapore Airlines stocks 10 times over a period of time, assuming the stock price remains at $6.13, the fees will be $270.10.
The Contract Value is the same for both instances ($6,130), but the fees constituted 0.48% for the former, and 4.41% for the latter.
Using Lesson 4, the Minimum Selling Price for buying 10 lots at one go is $6.195, while the Minimum Selling Price is $6.67, corresponding to a price increase of 1.1% and 8.8% respectively.
Therefore, when we’re buying stocks at Contract Value below $8,928.57, where we’re constrained by the Minimum Commission of $25, it will not make sense for us to buy one stock bit by bit over a period of time. This leads us to the last lesson of the day:
Lesson 6: Save $5,000 To Spend On One Stock At One Time
This is a lesson that Mr Salty learned that is purely based on his experience and opinion, and does not have a mathematical basis like the previous lessons.
While Mr Salty earns a decent income, he is still not a high income earner who can afford to buy stocks in the tens of thousands. Instead, after factoring all expenses, he can only save about $500 a month. While he is eager to start investing every bit of savings he has, Lessons 1 – 5 taught him that he cannot do impulse buying.
Instead, he developed an internal system, where he only starts looking for stocks to buy after he saved $5,000 (that is also after saving some money for emergencies). And when he finds a suitable stock, he will buy the stocks according to the $5,000 that he has, and not the “nice” number of lots.
If he decides to buy Singapore Airlines at $6.13, he will buy 8 lots (paying $4,932.85). If he decides to buy Mapletree Logistics Trust at $1.65, he will buy 30 lots (paying $4,978.87). Similarly, if he wants to buy Jumbo at $0.265, he will buy 180 lots (paying $4,798.79).
Use the following links to review the lessons covered in this post:
- Lesson 1: Use Sell Price – Buy Price To Give You An Indication Of The Potential Profit
- Lesson 2: Factor In Administrative Charges To Get The Actual Profit
- Lesson 3: We Incur A Loss Of $65 The Moment We Buy A Stock
- Lesson 4: Assume Commission Charges Of About $65 To Determine The Lowest Sell Price
- Lesson 5: Spend More, On One Stock, At One Go
- Lesson 6: Save $5,000 To Spend On One Stock At One Time
Parting Words
There are plenty of “philosophies” and “sure-win methods” when it comes to buying stocks, and Mr Salty himself subscribes to a certain school of thought. However, no matter what stock buying principle he subscribes to, he follows these basic steps in all his transactions. Because without knowing what the exact profits are, what the Minimum Selling Price is and not understanding how buying in small quantities incur a lot of unnecessary costs, we will always make a loss regardless of what school of thought we follow.
As to what stock buying principle he subscribes to, he will talk about it some time in the future. In the meantime, if you think that this post is useful and helps you understand how to buy stocks and gives you confidence to start investing in the stock market, please Like this post and Share it with your friends! Follow this blog for more stock buying lessons that Mr Salty himself learned the hard way.
Remember, salty is life!