Oran Hall, Contributor
QUESTION: I would like to know if I could start investing with $20,000. What is the process I have to through? Would I need to be fully involved? How much would a broker charge, should I get one? Any additional information which may be pertinent I ask of you to share.
FINANCIAL ADVISER: If you are going to invest in stocks, you will need a stockbroker, because only brokers, who are members of the Jamaica Stock Exchange, can execute orders on the stock exchange. Although one of their major objectives is to serve their clients well, they are in business to make money so their charges will reflect that reality.
There is a wide difference between the minimum transaction that a broker will accommodate. One broker, for instance, accepts orders for as low as J$25,000, but another accepts a minimum order of S$500,000.
Brokers tend to charge a commission of two per cent of the value of the transaction, whether buying or selling. You will note that two per cent of J$25,000 is J$500. The minimum charge of the first broker I mentioned is J$500, so even if your order of J$20,000 is accommodated, the charge to execute the trade would be J$500.
The process is essentially the same for all brokers. You would need to open an account by first completing a Client Agreement Form, which captures important information on the client. Brokers also require at least one form of identification, two references, and proof of address.
Importantly, the broker will also need to know the source of the funds, and generally requires a deposit for the first transaction. Depending on the level of the relationship that develops between you and your broker, the requirement for a deposit on subsequent transactions could be reduced or waived. Most of the above are required by all brokers to comply with statutory regulations.
In general, you will likely be assigned an adviser who will relate to you in matters regarding your account. Although your adviser can be expected to make you aware of what is happening in the market and guide you in making your decisions, ultimately, the final decision is yours so it is important that you know what you want and what is happening in the market, and understand how the market works.
Frankly, I suggest that you break into the investment business through the unit trust. For one, unit trusts do not have the high minimum investment sums required by the stockbroking community.
Furthermore, although it may take some effort to determine which unit trust to invest in, you do not have to worry about deciding which stock to buy. Investment decisions are made by the people who manage the funds, and there is a wide variation in the funds on the market.
Additionally, it is easier to convert your unit trust investment to cash than it is to liquidate ordinary stock. After building up your resources and improving your knowledge and understanding of the stock market, you can make direct purchases of stocks.
Notwithstanding what I have said before, investing in stocks is a sensible course to take. Over the long term, equities outperform other forms of investment, so they do have a place in any portfolio.
But I do not believe equities are for everybody. They are not for individuals who are not able to handle losses, or for individuals who cannot afford to lock up their funds for a long time. The stock market is not for constant short-term buying and selling. One risk of that course is the reduction of gains from the cost of buying and selling.
You should bear in mind that there are expenses other than the commission. The trade fee, which goes to the Jamaica Central Securities Depository, increases with the size of the transaction. It starts at J$85 per transaction trades up to J$50,000. The Jamaica Stock Exchange cess is 0.2 per cent.
Do not get discouraged by the fact that few brokers will accept your business of J$20,000, and note that the minimum transaction value relates to each transaction. The unit trust is a very good alternative until you are in a better position to transition to the stock market.
Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free counsel and advice on personal financial planning.