Thursday, July 21, 2011

Can You Invest in Stock with RM1000?

Yes, of course. You can even invest with RM300 (that if could find one) if you want to just that the cost of investment will way higher.

I have friends who use to ask me that question. "I have RM1000, can I invest in the stock market with that amount?". Yes, you can though RM3000 at least will give you the lowest cost. So should you wait till you have RM3000 before you invest? Not really.

Consider this. An X investment bank charges the minimum RM12 or 0.5% transaction fees per trade whichever higher. I'll exclude stamp duty and all that for simplification purpose. Then consider these 3 scenarios:

Invest with RM300
Minimum: RM12
0.5% of RM300 = RM1.50
So you transaction fee will be RM12 since it is higher.
Cost of investment = RM12/RM300 x 100% = 4%!

Invest with RM1000
Minimum: RM12
0.5% of RM1000 = RM5
So you transaction fee will be RM12 still.
Cost of investment = RM12/RM1000 x 100% =  1.2%

Invest with RM3000
Minimum: RM12
0.5% of RM3000 = RM15
So your transaction fee will be RM15 since it is higher.
Cost of investment = RM15/RM3000 x 100% = 0.5%

So now you can see clearly that investing with RM3000 gives you better cost saving. Now here is a little thing that you need to learn about investing: opportunity cost

Say you found (ICAP) is a good investment and you want to invest in it. I'll pick ICAP since it is easier to explain. If you do a little research on ICAP, you'll know that this is a closed-end fund. Which means there are 2 parts in its price.

First is the NAV which is tells you the mark to market asset value of the fund. put it simple, say it has RM100mil worth of stocks and RM100mil worth of cash, its NAV will worth RM200mil. divided by the number of units/shares issued say 100mil shares, it's NAV price would be RM2. Got it?

Then it also has the other part which is the market price. This market price is not always related to its NAV. It can be more (premium) or it can be less (discount). It is about how the general market feels ICAP is worth just like the stock market price. Supply and Demand ma. And this is the price which is shown on your trading platform when you key in ICAP or the current price demand from the market. So this is the price you would pay if you were to purchase it.

Now based on July 17th price, ICAP NAV is now RM2.79. It's market price is RM2.19. That would mean it is now selling at a discount to NAV which also mean you can purchase RM2.79 worth of stocks and cash for RM2.19. That is a 21.5% discount to NAV!

Say you were to wait till you have RM1000 before you invest, your opportunity cost for omission would be 21.5% - 1.2% = 20.3%!!!
That is Hell A Lot! Giving up 20.3% just to save 0.7% doesn't make any sense if you find ICAP a good investment. Plus if you know how ICAP invest, you would know that they won't hold onto a stock if they feel there is little upside on it versus the downside. So there is potentially bigger losses. Sorry to say this, isn't this what we call penny wise pound foolish?

The same goes to stock. If you find a good stock that is selling cheaply compare to its valuation, do the math above to see if it is worth saving that small transaction cost.

No comments: