Wednesday, January 14, 2009

Earn in 1 Tick without That Much Money ?

Recently I shared about the cheapest brokerage fee I find for KLSE market - 0.05%.  But in order to effectively enjoy that low brokerage rate, each of your transaction should be more than $16,000 due to its minimum imposed $8 fee.  Basically 8 divided by 0.0005 is 16,000 !

What if you don't have $16,000 in every transaction ?  Should you still apply for this account ?

The simple answer is yes because even though you are investing in a much smaller way, you are still saving more because $8 fee is still lower than $12 and $40 aka other brokers' minimum fee ! ( detail post here )

But the whole idea of LOW brokerage fee is to allow investor to earn in one Tick ( one smallest step change in unit price ) !  Can you still earn in one Tick i.e from $1.00 to $1.01 if you have less than $16,000 !?

Before showing all the numbers, lets review what other charges are imposed here when we invest;
Brokerage Fee : $8 or 0.05% whichever is higher
Clearing Fee : 0.04%
Stamp Duty : $1 for every $1,000 or parts of it
Assuming we buy and sell the shares on different days, that means we pay twice for the fee above at different prices, ie. once when the unit price is $1.00 and another when we sell at $1.01 ( one Tick ) !

Below table shows how much you earn or lose when price moves from $1.00 to $1.01 with different amount of investment.

You can see that even with the LOWEST brokerage fee in the market, if you buy a $1.00 share with only $1,000 you still CAN NOT EARN money in one TICK !!  As a matter of fact, you will lose $8.80 !!

You will need at least $2,391 to break even.  Or from above table, you will start earning money, ie $5.60 if you invest with $3,000 !!

So the answer is still YES, if you don't have $16,000 you still can earn money in One Tick if you invest each time with more than $3,000 when the unit price is $1.00  !!

Don't underestimate this $5.60 or 0.19%.  If you are able to do this once a week, continously for a year.  Then your effective rate of return is 0.19% x 52 = 9.88% annual return, compare to 3% FD !!  Ofcourse it is unlikely one can consistently achieve 0.19% every week.  The point here is NOT to get excited about the 9.88% but NOT to underestimate the 0.19%.

You may also observe the rate of return remains the same as 0.62% when your invest amount is $16,000 and above.  That is due to the mini-optimum trading size we talked about earlier also.