1 Important Point to Note about the Big Upcoming Change to Singapore’s Stock Market

Credit: andrechinn

19 January 2015 is just five days away and I can’t wait for it arrive. That’s because that is the day when Singapore’s stock market would see a reduction in board lot sizes from 1,000 to 100 shares.

The change, which was pushed through by stock exchange operator Singapore Exchange Limited (SGX: S68) back in August 2014, would make highly-priced shares like Jardine Cycle & Carriage Limited (SGX: C07) and United Overseas Bank Ltd (SGX: U11) a lot more affordable for individual investors like you and me. Currently, both shares would easily set an investor back by tens of thousands of dollars just for the purchase of one lot of shares.

But despite the advantages that this big change to the local investing scene can bring to mom-and-pop investors, there’s still one particular gripe about it which I hear often (of course, this is just my anecdotal experience, so take it for what it is) – and that is, that there are no signs of brokerages dialing back their fees.

As my colleague James Yeo pointed out last year, the majority of brokerages in Singapore are charging minimum commission fees of S$25 per trade. This level of commissions is a complaint for many individual investors I’ve spoken to. They feel that an investment of a few hundred dollars, (or even a thousand dollars) each time would see a large chunk of one’s capital being eaten up.

That’s a valid complaint. For a trade of S$500 in size, the minimum commissions of S$25 would represent an immediate 5% loss for the investor right from the get go. But, here’s where I’d argue that investors shouldn’t let the commissions-tail wag the investing-dog.

Back in May 2013, I had bought shares of Japanese food & beverage retail outfit Japan Foods Holding Ltd (SGX: 5OI) at a split-adjusted price of S$0.35 each. My investment amount was relatively tiny – I had bought only 3 lots, so that works out to an investment of just a hair above S$1,000. I too paid a minimum commission of S$25 per trade, so that meant I had lost almost 2.5% of my investment before any compounding can start.

Today though, Japan Foods is selling for S$0.54 per share, bagging me a 54% gain from my purchase price. Excluding commissions, my investment would earn me a profit of more than $500 if I’m selling now. It would still be very close to S$500 even after accounting for commissions on both the purchase and sale, making the commission-issue pale in significance.

So, here’s the thing: If I was wary of the commissions in the first place and refused to invest because of that, I wouldn’t have been able to sit on my current gains at all.

The same principle works even for the highly-priced shares which would become more affordable come 19 January 2015. If they’re good businesses that can compound wealth over the long-term, paying high commissions for them after the lot-size change would still make sense – just like how it is with Japan Foods.

Of course, this doesn’t mean that I wouldn’t be happier if brokerages in Singapore are charging lower commissions. In fact, I’d be jumping for joy if the minimum fees were way lower. But the reality of the situation is that we’re getting charged a certain amount of commissions – and that’s just something we have to deal with.

It would be a pity if investors decided not to invest because they were put off by the commissions. Between the choice of (1) paying high commissions to stand a chance of potentially earning satisfying gains over years with a purchase in good businesses that can compound wealth over the long-term and (2) not investing at all because the commissions seem high, I’d pick the former anytime. How about you?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Japan Foods Holding.