Published on Aug 04, 2013
Open broking and CDP accounts, then do the homework on how and what to invest in
By Jonathan Kwok
A friend of mine was keen to join the rush for a slice of the initial public offerings (IPOs) of SPH Reit and OUE Hospitality Trust but found herself frustrated and stranded.
It wasn't a case of being short of cash; she could have afforded a tranche of stock. Rather, she was held back because she had not opened an account with The Central Depository (CDP), which holds Singapore-listed shares for investors.
By the time my friend rushed down to the CDP to open an account it was too late, at least for these two trust offerings.
"I'll just have to miss these IPOs," she lamented.
Her predicament is actually rather common, from what I see of the people around me.
I'm often surprised by how many of my peers do not even have a broking or CDP account, even though it does not cost a cent to open and maintain the accounts.
These friends have been earning a graduate's salary for several years. It would be understandable if they were saddled with heavy student loans or needed to support their families, but some of them are relatively free of financial commitments.
Some say they have little money left over after spending on things like travel while others just leave their money idle in the bank, claiming they have no time to open their broking account or learn to invest.
The importance of investing was highlighted by several readers who wrote in after I outlined in this paper how we can limit spending to about $35 a day in order to grow our savings.
"Saving is one thing, but the more important thing is making your money work hard through investments," said former stockbrokers Lena Yong and Andrea Sankar.
It's a message that can't be emphasised enough - that while it's good to save more, it is of little point to young adults if your cash is not made to grow via investments.
Of course, stocks come with all sorts of risks.
Your shares may fall below the price you paid, leaving you in the red. In extreme circumstances, companies can collapse or scandals erupt, wiping out your cash.
The fickle nature of stock markets can be seen in their historical performance. Over the past six years, Singapore's Straits Times Index (STI) has actually lost an average of about 1 per cent per year. If you had bought shares in late 2007, you would have entered at the peak of the previous market cycle, and prices haven't fully recovered since.
But over the longer term, shares tend to trend upwards.
Over the past 10 years, the STI has gained an average of 6 per cent per year. The gains were made in the years before 2007 - after that it was basically a big crash during the financial crisis followed by years of recovery.
Economists Robert Barro and Sanjay Misra have calculated that stocks in the United States returned an average of 7.4 per cent annually from 1836 to 2011, even after adjusting for inflation.
Compare this to your savings losing 2 to 4 per cent of their value every year due to inflation.
Singapore's low bank deposit rates can't get near covering that.
The problem with cash is highlighted by investment guru Warren Buffett, who argues that money is extremely risky to keep because you are bound to lose purchasing power over time.
Using his reasoning, holding cash can be seen as more risky than stocks, which still have a good chance of beating inflation over time.
Open the accounts
The first move is to open your broking and CDP accounts.
Opening and maintaining the accounts is free so you can do so even if you do not have enough cash or are unsure of what stocks to buy.
The long list of broking firms includes CIMB Securities, DBS Vickers, Lim & Tan, Maybank Kim Eng, OCBC Securities, Phillip Securities and UOB Kay Hian. Any one of them can help you to open your CDP account as well.
You get one CDP account but can open accounts with multiple brokerages, all linked to this CDP account. You can then choose which broker to trade with.
You should also speak to the remisier - who helps you with your trades for a commission - assigned to you by the brokerage firm. He or she can explain basic trading and how to use the online trading platform for the brokerage.
Key considerations
Next up, you should plan your finances and do your homework on what stocks to buy and when to buy.
It is unwise to put all your savings into shares. You should have an emergency fund of several months' worth of living expenses before you start investing, in case of a financial emergency.
In terms of stock selection, the local market has a number of large, well-known companies with long operating history that should provide some level of comfort.
Exchange-traded funds offer an even better alternative, allowing you to buy into a portfolio of stocks so the impact is limited if one or two stocks should collapse.
Investors typically tackle the question of "when to invest" via two methods.
One involves "timing the market" - trying to buy stocks when you assess that the price is low. You will need to judge whether the shares are under- or overpriced.
The second method uses the concept of "dollar-cost averaging". This involves setting aside a fixed amount of money to invest every month to buy a pre-set portfolio of stocks.
If prices are high, the money can buy fewer shares, but when the market falls, the same amount will be able to buy more.
Proponents say dollar-cost averaging takes the burden of timing the market off the investor. The price paid for your stock will be averaged over many months.
OCBC Bank, POSB Bank and brokerage Phillip Securities offer regular share investing plans utilising dollar-cost averaging.
POSB's plan involves investing in an exchange-traded fund that tracks the STI.
OCBC and Phillip Securities allow you to choose the STI exchange-traded fund, as well as some individual large stocks.
In any investment programme or stock trade, you should keep in mind the transaction costs imposed by the bank or brokerage.
Once you have bought the stocks, I recommend holding them for the longer term so they have time to appreciate in value.
The investment plans offered by the banks don't need you to have a broking and CDP account, but these are really the exception rather than the norm.
In general, these accounts are necessary before you can invest, so it is best to open them pronto, regardless of what shares you are eyeing or whether you prefer to time the market or use dollar-cost averaging.
With the trading infrastructure in place, you won't have to miss out on the next big investment opportunity - or the next red-hot IPO.
jonkwok@sph.com.sg
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