Trading for newbies: Discount brokerages

Posted on 29 June 2011

Dollarsing shares some tips for the first time trader or investor.

Investment speak

Sound like a pro in no time.

Trader vs Investor: Individuals or firms trading equity (stock) on the stock markets as their principal capacity are called stock traders. Stock traders usually try to profit from short-term price volatility with trades lasting anywhere from several seconds to several weeks. On the other hand, stock investors are firms or individuals who purchase stocks with the intention of holding them for an extended period of time, usually several months to years. They rely primarily on fundamental analysis for their investment decisions and fully recognize stock shares as part-ownership in the company.

Retail investors: Individual investors who buy and sell securities for their personal account, and not for another company or organization.

Brokerages: Financial institutions that act as stock brokers. Brokerage firms serve a clientele of investors who trade public stocks and other securities.

Poems: Refers to Phillips’ Online Electronic Mart System, the pioneer for Singapore’s online share trading, established by Phillip Securities Pte Ltd in 1996.

Margin trades: Borrowing money from a broker to purchase a stock — think of it as a loan from your brokerage. Margin trading allows you to buy more stock than you’d be able to normally.

CDP: An organization holding securities either in certificated or uncertificated (dematerialized) form, to enable book entry transfer of securities. A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into debtsecurities (such as banknotes, bonds and debentures) and equity securities, e.g., common stocks; and derivative contracts, such as forwards,futures, options and swaps.

Photo: PERPETUAL TOURIST / Creative Commons

ALL first time traders worry about making up for transaction costs. Each trade on the Singapore Exchange for example, comes with a $25 price tag, leaving retail investors (trading below S$59K per contract) no choice but to cash in on their stock only when they are able to recruit back the sum.

Discount brokerages help bypass this hurdle by charging lower commission fees in exchange for no frills or reduced services. These are targeted at DIY investors who research and trade on their own.

Firms like Interactive Brokers offer minimum order fees as low as US$1.00 per US stock while the fee for other stocks remains below US$12. Swiss stocks are the most expensive, having a CHF10 or US$12 minimum fee attached. Interactive brokers however, does not offer trade in Singapore.

A good local alternative is the Online Trading Platform recently released by Standard Chartered Bank (SCB). With no minimum fees, it seems worth a shot and you get access to worldwide markets.

Is it really better?

Let’s compare the cost between using two similar online platforms: Poems vs SCB Online Trading (see table at bottom).

The saving – 0.47%

Charges using SCB online amount to only 0.23%, compared to traditional brokerages which charge 0.7%. While the difference between $27 and $9 may not seem like a huge saving, imagine what 0.47% could mean if one were to trade say, 10 stocks: $18×10 = $180 could be saved.

Besides, the trade above only recorded Buying only. Commission also exists for Selling. So if I am a small retail investor, SCB Online Trading certainly will benefit me.

But here’s the downside:

  1. With SCB Online Trading, you are not allowed to use margin trades. Then again if you are starting out it is not advisable to be involved in more financially complicated margin trade. Furthermore, margin trading is more for traders than investors.
  2. You are not allowed to short the stock, ie. you are not allowed to sell shares that you do not own with SCB Online Trading.
  3. The shares that you bought are kept with SCB instead of the Central Depository (CDP). Personally, I do not find much problem with this because the only issue is that you are not able to sell the shares you brought with SCB using other brokerages.

*For large retail investors, there is no difference in using discount brokerage or the traditional brokerage because you will be getting special rates for your brokers.
* Author has no position in Cache Logistic Trust at the time of writing.
* Author has no links with SCB Online Trading – Just sharing what he finds useful with fellow readers learning about investing
* Author is not responsible for the result of your trading. Fees and regulations may change. Seek out and find out more from the respective brokerage houses before opening up your account.

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  • Landon Leo

    “ALL first time traders worry about making up for transaction costs”

    Hmm? Thats actually one of the last things to worry about. So precisely why ALL 1st time traders worry about the least important things.

  • Victor

    Transactions cost is the last thing a new trader/investor should worry.

    You don’t know what you don’t know. If you build a good relationship with your broker, your broker can educate you alot about the stock market.
    If you do know what you don’t know at least you can ask your broker. If your friend’s information is more realiable than a MAS licensed broker, by all means rely on your friend.

    A very good example is accidental short selling in the Singapore Stock Exchange.
    Your broker can help you borrow the shares at a small cost(plus some adminstrative work) and help you settle the situation instead of you having to go through buying in and incure SGX penalty charges which can amount to $1000.

  • http://newnation.sg Shihan

    Alamak. So as a first time trader, what should I be worried about? I may start trading soon just to beat inflation.
    @victor: First time traders won’t engage in short selling as it’s too technical. And I guess there’s some aversion to looking for brokers because brokers are opinionated too. If the newbie trader or investor does adequate research about the stocks or products he’s buying, why should there be any worry?

    • Victor

      Precisely. Thats why the word “accidental” is there. The newbie doesn’t want to short sell a stock. He/she just wants to the stock that he “thought” he has. Or maybe the quantity that he/she has.

  • Landon Leo

    @Shihan

    This is why short selling is not allowed in China.

    Adequate research is not the answer.

  • Landon Leo

    @Victor

    I won’t ask brokers. As you climb the ‘financial ladder’, you will find that 95% of all retail brokers are no more than salesmen trying to make the market.