Dealing With Smaller Board Lot Sizes

Foreword from ShareInvestor

This article “Dealing With Smaller Board Lot Sizes” by Cai Haoxiang was first published in The Business Times on 19 Jan 2015 and is reproduced in this blog in its entirety.

Watch the fees and partial fills, don’t diversify too much, and use the opportunity to test your ideas. BY CAI HAOXIANG

THE Singapore Exchange (SGX) will make a long-awaited change today to cut the size of its minimum trading unit – known as a standard board lot – from 1,000 to 100 shares.

For the retail investor, the change means easier access to certain stocks which had a high absolute share price in the past, like the three local banks.

More importantly, those who want to practise their stock-picking skills now need to commit less money to purchase some of the most liquid and financially strong stocks on SGX.

For example, it used to cost anywhere from S$10,000 to S$24,000 to get hold of the minimum standard block of OCBC, DBS or UOB shares, for example. Now, it will cost S$1,000 to S$2,400.

A smaller board lot size has a number of advantages for investors with less resources. For one, it allows investors to test out whether dollar cost averaging, a disciplined strategy to buy the same amount of stock at regular intervals, works for them.

However, investors have to understand that just because a stock costs less to obtain, it is not necessarily “cheaper”. What is cheap or expensive should be evaluated on fundamental terms such as earnings, cash flow, dividend or book value ratios, as explained in the column below.

Other issues investors need to look out for are fees, over-diversification and partial fills.

Even as they jump into individual stocks, investors should not neglect index funds, a tried-and-tested way of getting exposure to an entire market or sector by buying an exchange-traded fund (ETF) or mutual fund tracking an index.

We round off today’s feature by introducing some of the less-known stocks trading at higher share prices, that have now become more accessible.

Watch The Fees

Just because blue chip stocks are more affordable per lot doesn’t mean you should go out to buy them if you just have a few hundred dollars to spare. You can get one lot of SGX, for example, for about S$800.

Does that mean you should just buy one lot? Keep in mind that if you buy those shares through a local online broker, you are still paying around S$25 in fees. That’s a 3 per cent expense ratio. If SGX goes up by 5 per cent the next day, you might feel happy and want to sell your shares to make S$40, enough to pay for a restaurant meal. But when you sell, assuming you sell online, you pay another S$25 in fees. Your S$40 profit has turned into an overall S$10 loss.

Of course, if you’re in this game for at least a year, and SGX maintains its S$800 value as well as its dividend payouts, you are likely to get 28 cents a share in total dividends.

That’s S$28. Hey, that’s another restaurant meal. How much interest did your bank pay you last year, again? There are some advantages to having a longer time horizon.

Fees, perhaps, are relative to how long you are willing to hold on to a stock for. If you buy a blue chip stock and hold it for 10 years, chances are you will get back dividends that far exceed whatever you have paid in fees.

If you’re the jumpy sort, and like to buy and sell multiple times in a month, you should not be trading just a few hundred dollars at a time.

Those fees will eat up your returns. Put in another way, your hurdle to making a profit becomes much higher and harder to achieve.

Don’t Diversify Too Much

One attraction of smaller board lot sizes is that with a certain amount of money, say S$10,000, you can now buy a bunch of cheaper stocks at one go.

Ooh, here’s DBS for S$2,000. I’ll add OCBC for S$1,000 and UOB for S$2,400. Maybe some lots of CapitaLand for S$320 each and some more Keppel Land for S$350 each. Hey, diversification is good, right?

Not necessarily. Diversification, of course, helps to reduce the risk that a single stock will fail due to a business collapse. But it is most useful if the assets concerned are not correlated with each other. This means they do not go up or down in tandem.

For example, during the financial crisis, all three local banks plunged together. When the region recovered, all three stocks went up together. Similarly, both CapitaLand and Keppel Land have property businesses in China. The slowing property market there has affected their shares in the past couple of years.

What makes you money are concentrated positions in stocks that appreciate tremendously. Diversifying too much spreads out the impact.

Since the global financial crisis, all sorts of financial assets have become increasingly correlated with one another due to the influence of central banks on trading activity. It has become harder to diversify.

You are also not likely to have the time to track a portfolio of 20-30 stocks. Investment sage Warren Buffett once quoted Broadway showman Billy Rose to make his point against over-diversifying: “You’ve got a harem of 70 girls; you don’t get to know any of them very well.”

Watch The Partial Fills

Partial fills are another problem for those who buy stocks that are not that actively traded.

The problem is this: Say you put in an order to sell 800 shares of an illiquid company at S$8 each. That is the minimum price you are willing to sell the stock to, say, make a profit on what you had previously bought.

If all went well, your total proceeds would be S$6,400, and your trading fees around S$30 – or 0.5 per cent. That’s pretty reasonable.

But suppose people are only willing to buy 100 shares of the company at S$8, meaning that 100 shares are bidded for at S$8.

The rest of the market think that S$8 is not a good price to buy the stock. Others put in successive bid prices for 200 shares at S$7.95 and another 500 shares at S$7.90.

Once you enter your order specifying you are willing to sell 800 shares at a minimum of S$8 (the most common type of order known as a limit order), your broker will just end up selling 100 shares for you at S$8, because that’s all the buying interest he can find. Suppose nobody else is willing to buy from you at S$8 that day, you will end the day with just 100 shares sold for S$8. Your brokerage fees will be about S$25 even as you get proceeds of just S$800.

You are caught in the “partial fill” situation: the bulk of your order to sell cannot be fulfilled due to insufficient demand at the price which you are selling at.

Meanwhile, you have incurred hefty brokerage fees relative to the amount that you have sold your stock for – S$25 on S$800 is more than 3 per cent, far more than the 0.5 per cent you would have paid if you had managed to sell all 800 shares at one go.

To get around this problem, SGX suggests using the “fill or kill” order. This means the whole order quantity must be matched in full or the order will be cancelled. However, not all brokers have this order option on their platforms.

To avoid this problem, make sure there is enough room for you to match the “bid” or “ask” price completely when you trade. This means paying what the market wants, instead of trying to dictate terms yourself.

Don’t Forget The ETFs

Even as you pick up individual stocks, don’t forget that stock-picking is an enormously difficult thing to pull off successfully.

If you don’t have enough time to devote yourself to studying various methods of evaluating companies, you are likely to be better off just putting your money in low-cost funds that track the broad market.

In Singapore, the Straits Times Index (STI) – a benchmark index of the 30 most liquid and financially stable stocks in the Singapore market – is tracked by two ETFs: the SPDR STI ETF, which has an expense ratio of 0.3 per cent, and the Nikko AM Singapore STI ETF, which has an expense ratio of 0.39 per cent. Both are reasonably low-cost.

Investors should also consider buying ETFs of other countries’ stock markets, notably those with large economies. There are also sector ETFs available for investors who want to be exposed only to, say, energy or healthcare stocks.

Some Companies To Study

With the introduction of smaller board lot sizes, many stocks on the STI benchmark will now be more affordable to purchase.

There are also stocks outside the STI that were previously higher-priced but can now be traded more easily by retail investors.

Insurer Great Eastern Holdings, a unit of OCBC Bank, is one of them. The company is not very liquid as much of it is owned by OCBC. The company is mainly in the life insurance business in Singapore and Malaysia.

Dairy Farm International is another. The company operates supermarkets and convenience stores in the region such as Giant, Cold Storage, 7-Eleven and Guardian. Dairy Farm is part of the Jardine Matheson group, which is an STI component.

Haw Par Corp, a holding company of UOB’s Wee family, is another (disclosure: I have some shares). Other than its stake in UOB bank and property firms UOL and UIC, Haw Par sells Tiger Balm plasters and ointments. It also operates Underwater World Singapore in Sentosa and rents out commercial and industrial properties.

Ultimately, smaller board lot sizes are beneficial to retail investors, who can start building their nest eggs with smaller amounts of money.

But if you’re new to investing, it is best not to jump into the stock market using all your money. Start small, and use the smaller board lot sizes to your advantage as a way to test your ideas.

There is no hurry to make money. Take your time, study the craft, and enjoy some dividends. Make mistakes and learn from them, before committing serious sums.