Tuesday, January 20, 2009

Minimum Optimized Trading Size

I have already briefly covered this in a few older posts like 

This is just an official recap.

When you invest in stock market through a broker, the broker will charge you a brokerage fee.  Its normally in percentage form with a minimum fee which ever is higher.  For example, 0.7% and RM 40.  

If you are investing RM 1,000 then 
RM 1,000 x 0.7% = RM 7
Since RM 40 is higher than RM 7 so you will be charged RM 40 for that transaction.
Like wise, if you are investing RM 10,000
RM 10,000 x 0.7% = RM 70
Since RM 70 is higher than RM 40 so you will be charged RM 70 for that transaction.
For the RM 1,000 case above :  Since you are paying RM 40 fee for a RM 1,000 investment, the actual fee you pay is 4%
RM 40 / RM 1,000 = 0.04 x 100 = 4%
In this case, your paid fee is 4% which is much higher than 0.7%.  If you use 0.7% to analyse your investment, you may end up losing while you though you have earn or break even.
For example, your RM1,000 investment has given you a 2% return.  You may thought 2% - 0.7% = 1.3%.  But after selling the investment you may end up losing 2% because 2% - 4% = -2%
Hence, it is important to know what is your Minimum Optimized Trading Size !  Which base purely on the 2 numbers :
Minimum Brokerage Fee and
Brokerage Rate
Minimum Optimized Trading Size = 
Minimum Brokerage Fee / Brokerage Rate

In above example;

RM 40 / 0.007 = RM 5,714.29

If your investment amount is above RM 5,714.29 then your brokerage fee is always 0.7%.  If you keep above this amount, you can easily use 0.7% to calculate your return.  Else you will need to minus your return from RM 40 instead of a percentage.

Lower brokerage fee does NOT necessary mean Lower MOTS.  See this table below.

RM 40 & 0.7% is a typical example if you use an agent ( real human being ) as your broker in Malaysia.
RM 12 & 0.42% is a typical online trading account where you perform the transactions online through web.

Typically, lowering brokerage rate without lowering the minimum fee will only make it worse for small investors.

Cheapest Brokerage Fee I found is from Jupiter offering 0.05% and RM 8, you can sign up through me, read that post here.

All these figures are valid for transaction amount lower than RM 100,000.  Rates above RM 100,000 are usually negotiable.