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What Really Matters For Retail Investors Regarding the Lot Size Change

Credit: Simon Cunningham

There’s been lots of ink (and bytes) spilled over the big change to Singapore’s stock market taking place today, namely, the reduction in the board lot size from 1,000 shares to 100 shares.

But the more information there is about something, the likelier it is that investors may get confused about what is or isn’t important. So, I’m here to help plug the gap.

What isn’t important about the lot size change for retail investors

Let’s start with the things that don’t matter first: Changes (or the lack thereof) in the level of trading activity and commissions.

According to an article published on Saturday by the daily national broadside The Straits Times, stock exchange operator Singapore Exchange Limited’s (SGX: S68) “top priority” for pushing through the change is to aim at “lowering the barrier for more retail and new investors to enter the market.”

In other words, what is important for the company is that it sees an increase in trading activity amongst retail investors in Singapore.

It’s understandable for Singapore Exchange to make that its “top priority” – the company has seen its revenue stagnate ever since it hit a peak of S$769 million in the financial year ended 30 June 2008 (FY2008).

Given that “retail investors currently account for around 30 per cent to 35 per cent of the bourse’s daily turnover,” according to the same Straits Times article, Singapore Exchange would naturally want to find ways to boost trading activity amonngst that demographic.

But, what’s important for Singapore Exchange isn’t important for retail investors like you and me.

Billionaire investor Warren Buffett once wrote:

“One of the ironies of the stock market is the emphasis on activity.  Brokers, using terms such as “marketability” and “liquidity”, sing the praises of companies with high share turnover (those who cannot fill your pocket will confidently fill your ear).  But investors should understand that what is good for the croupier is not good for the customer.  A hyperactive stock market is the pickpocket of enterprise.”

Put another way, it is less activity which benefits the investor, not more. So, even if there isn’t any noticeable increase in trading activity even after the lot size change has been put in place, there really isn’t much for retail investors like you and me to fret about.

Another thing which has been on people’s minds, but which shouldn’t matter much to retail investors, is the high level of commissions.

Think about it. If a company can go on to double, triple, or gain even more in price over a five, 10, or even 20-year investing period, then commissions which may cost an investor up to, say, 5% (or even 10%) of his or her investment capital may still very much make sense.

Here’s a hypothetical example. Let’s say a share of Company A can be bought for S$4.75 each today. If you purchase 100 shares and pay your broker a commission of S$25 (the majority of local brokerages were charging this level of commissions as of March 2014), your total invested capital would be S$500.

Fast forward 10 years later and Company A’s shares have tripled in price to S$14.25. In other words, your portfolio of Company A’s shares would be worth S$1,425. If you sell it on 19 January 2025 and pay a S$25 commission for the sale, your total profit would be equivalent to S$900 (profit = S$1425 – S$500 – S$25 = S$900). That works out to a 180% gain on your initial invested capital!

If you were squeamish over the level of commissions and chose not to invest initially, you would have lost out on the opportunity to grow your capital.

Low commissions would be a great boon for the local investing scene. But the reality is that we’re still being charged relatively high commissions – it’s certainly not an ideal situation, but that shouldn’t put off investors from investing.

What is important about the lot size change for retail investors

For retail investors, what really matters here is that the board lot size change can make high-priced shares affordable and also make it easier to construct more-balanced portfolios.

Prior to today, shares like Jardine Strategic Holdings Limited (SGX: J37) and DBS Group Holdings Ltd (SGX: D05) would easily set a retail investor back by tens of thousands of dollars for the purchase of just one lot. As of 16 January 2015, the former traded at US$34.24 per share while the latter has a share price of S$19.81.

With the lot size change, the duo – as well as other high-priced shares – can be bought for just a few thousand dollars per lot. In other words, more choices have opened up for retail investors with the lot size change.

The second important thing is something that I find hasn’t been given enough attention by the local financial media, and that is, the greater ease with which we can construct more-balanced portfolios.

Let’s say an investor has S$10,000 to start with for investing. Even if the investor would love to purchase, say, shares of Hong Kong-based real estate owner and developer Hongkong Land Holdings Limited (SGX: H78) as part of a diversified portfolio, he or should would have simply been unable to do so.

That’s because prior to today’s lot size change, one lot of Hongkong Land at US$7.50 per share (the firm’s share price as of 16 January 2015) would see the company essentially make up the lion’s share of the investor’s portfolio. With the lot size change, investors’ resources can be spread more evenly in order to achieve prudent and effective diversification.

A Fool’s take

Today marks a very important occasion for retail investors in Singapore as the lot size change means that it is now easier for us to achieve proper diversification as well as access a much wider variety of shares.

Our local bourse may or may not see a surge in trading activity; the level of commissions charged by the brokerages here may also never change (I certainly hope commissions can be lowered though!). But, these two issues really don’t matter much for the retail investor.

So, do not let yourself get bogged downn by the unimportant things – focus only on what really matters.

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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 doesn't own shares in any company mentioned.