Advisory Column: Interested in buying stocks, but need a strategy
QUESTION: I am really interested in stocks. What would be the general cost to purchase a stock and how much is the recommended amount of stocks? Do we purchase stocks just to sell them back, and can we make a living from this? Approximately how much would a broker charge?
FINANCIAL ADVISOR: In addition to the price of each unit of stock and the amount of units purchased or sold, the full value of a stock transaction on the Jamaica Stock Exchange is determined by the commission paid to the stockbroker, the Jamaica Stock Exchange (JSE) cess and the Jamaica Central Securities Depository (JCSD) fee.
The commission is charged on both sides of a transaction, that is, both buyer and seller pay a commission to the broker. It is added to the cost of the stock on the buying side and deducted from the sales proceeds on the selling side.
There is no longer a fixed commission rate charged by all brokers. Each brokerage house sets its own commission rates, and in theory, if not in practice, clients can negotiate the rate with the broker. This is easier to do for large transactions. The general practice is to charge a commission of about two per cent of the value of the transaction.
The cess is 0.3 per cent on each side of the transaction. The JCSD fee is on a scaled basis and thus depends on the value of the transaction ranging from $90 to $535 on each side of the transaction.
For a transaction to take place on the JSE, it must be of a certain minimum size, which is called a board lot. A board lot is 100 units regardless of the price of each unit of stock. The JSE uses a T+3 settlement cycle, meaning that transactions are settled three business days after the trade. Sellers are paid within three days of the sale and buyers pay within three days of the purchase of the stock.
How much you spend depends on how much you have to invest, but it should be at least one board lot. This does not mean that amounts that are not divisible by 100 are not allowed. You can, for example, buy 150 units of stock, but small transactions can be costly, in that brokers tend to charge a fixed minimum commission in dollar terms up to a level determined by them to earn enough to cover the costs associated with the transaction.
Investors buy stocks to make money primarily from the increase in their price, but from dividends as well. A profit is not realised until the stock is sold, so fluctuations in its unit price will naturally cause its value to fluctuate. Some investors set the level of return that they want from the investment and sell when that goal is met, but others often hold on to their stocks, wanting to gain more value.
Sometimes it works; other times, it does not as stock prices do fall, sometimes remaining low for extended periods. Other times, investors sell at a loss if they sense that the price will remain low for an extended period or will continue to fall. Investors call this cutting their losses.
There are, nonetheless, investors who buy stocks without any serious plans to sell. By buying and holding, they expect to make significant gains over the long term. In fact, it has been established that investing in stocks yields superior long-term returns
It is not normal to attempt to make a living from trading stocks, but there are indeed some investors who own such large portfolios that it is not far-fetched to accept that the dividends they receive can pay their living expenses substantially. And there are other persons who trade heavily and sometimes make substantial profits, but it is also worth remembering that substantial losses can also be made.
My advice is that you should take a long-term view of investing and that you do not allow greed to drive you. At the same time, if you are so risk-averse that you cannot tolerate losses, you should avoid investing in stocks.
Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel.