Oran Hall | Small investors can buy stocks
QUESTION: Is there a minimum amount of money required to open an account at the brokers or to buy stock?
FINANCIAL ADVISER: The small sums required to open investment accounts or buy stocks and some other investment instruments convey a clear message from the stockbroking community that it is very open to small investors participating in the market.
From the companies, I was able to get information in preparing to respond to your question, the most common requirement for investing in stocks is the ability to buy 100 units of stock. I did find one situation in which the minimum was 200 units. Of course, the sum required would depend on the price of each unit of stock.
The broker's commission, payable by both buyer and seller, is generally 2 per cent of the gross value of the transaction, but one brokerage house reduces the commission to 1.5 per cent for online orders.
Most brokers require their clients to pay a minimum commission varying from $200 to $500. This flat minimum commission applies in cases in which the value of the transaction is less than $20,000 in one case and $25,000 in another; the 2 per cent applies to transactions over that amount.
What is interesting, though, is that there are cases in which there is no minimum commission, as the 2 per cent commission applies to all transactions.
It is not hard to understand why the brokers would set a minimum commission as they would want to recover the cost associated with each transaction. Where possible, it would make sense to invest a sum of at least $25,000 as the commission on transactions below that level would make the unit cost traded price of the stock plus fees very high. It would only make good sense to pay a commission of $500 on 100 units of a stock if the price is $250 per unit.
There are companies that require clients to open an account with a sum higher than the cost of 100 units. One company requires new clients to open an account with $500,000, although clients may place orders for 200 units of stock in subsequent transactions, but I came across one case in which $10,000 and another in which $5,000 is adequate.
In addition to the commission, investors must pay other fees: the JCSD trade fee, which varies from $110 to $660 depending on the value of the transaction and the stock exchange cess of 0.3 per cent, or 30 cents per $100, on the value of each transaction. All fees attract GCT of 16.5 per cent.
With respect to fixed income securities, the minimum sums are much higher with the requirement being $1 million in several instances.
In the case of unit trusts, there is great scope for small investors to enter the market. One unit trust accepts a minimum investment of $500, but most require investors to buy a minimum of 100 units - the cost being determined by the unit price and the number of units.
It is worth noting that the minimum number of units that may be bought from some unit trusts depends on the fund in which the investment is being made, so there are cases in which the minimum number of units an investor may buy from the same unit trust may be 200, 500 or 1,000.
Investors are generally discouraged from divesting their ownership of units in the unit trusts shortly after buying them as a penalty tends to be imposed on investors who encash units less than 90 days after making the investment.
You need not wait to have significant sums of money to start investing. Small investors can make investments as they are able to.
You can invest a specified sum in particular securities over time. This will relieve you of the challenge of determining when to buy, but will allow you to make purchases of stock and units in capital growth funds at various prices, considering that they tend to fluctuate. This can work to your advantage.
- Oran A. Hall, principal author of 'The Handbook of Personal Financial Planning', offers personal financial planning advice and counsel. Email email@example.com