Is Margin Trading Right For You?

Leverage your money. That's what many of us have often been told or practising. However, not all forms of leveraging is good. For example, not repaying fully your credit card bills and servicing high amount of interests is not a good way of leveraging. To sum it up, you need to weigh the cost and benefits of such leveraging and the associated risk before jumping into it. If the cost outweighs the benefits and comes with high risk, such form of leveraging is obviously not for us!

In equity trading, there are generally two forms of account, being cash account and margin account. Cash account simply means you pay cash up front, before purchasing shares. In countries where settlement period (T+x day) is allowed, full settlement has to be made upon the maturity of the settlement period. Margin account, on the other hand, allows an investor to purchase more shares than his cash deposit allows, normally two times the amount. For example, supposed you have $10,000 in cash deposit, you are allowed to purchase up to $20,000 worth of shares. The other $10,000 is like a form of borrowing from you broker or securities firm, in which they will charge you interest (for the amount of borrowing) based on prescribed interest rates calculated on a daily basis.

Effectively, this is a form of leveraging. Question is, is this a good form of leveraging? Let's explore the advantages and the inherent risks.

Quite clearly, margin trading allows you to trade more than what you have, and therefore, allows you to make more money if your share price projection turns out to be correct. However, the same holds true (i.e., more losses) if the share price goes against your direction!

Here's the added risk when the direction of the share price goes against you. When the amount of shareholding falls below a certain predetermined amount (by the broker or securities firm), the broker is entitled to issue a margin call. What a margin call simply means is that you will need to top up the shortfall immediately or latest by the next business day.

For example, supposed you have cash deposit of $10,000 and you have bought shares worth $20,000. Let's say share prices have gone down by $6,000 and you now have $14,000 remaining. Your net cash position now is %$4,000 ($10k - $6k loss). Assuming margin requirement is 30%. you will need to maintain a minimum of $4,200 ($14k * 30%). In this case, there will be a margin call given your net cash position runs below the safety margin.

Failure to top up within the set timeline will render the broker disposing your shares. Worst of all, it can be done without your knowledge!

To further add salt to the wound, your losses could be blown out of proportion as you continue to top up your margin but the market further deteriorates against your expectation!

You need to be also aware that the amount borrowed incurs interest on a daily basis. As such, it is an added cost of investment. As such, there are holding costs should you decide to hold on to a stock.

In conclusion, my advice is do not trade margin account unless you absolutely understood the kind of risk that you are dealing with and is prepared to take on such risk without major adverse consequences. Personally, I do not and will never trade with a margin facility. Simply, it's way beyond my tolerance of risks!

How To Invest In Overseas Equity Market?

For those who would like to diversify their portfolio investments beyond the local shore, this article sets to explore the ways to do so. Just to emphasize, I am articulating on direct or active investment instead of passive investment such as investing in unit trusts.

Thanks to globalisation and increased investors' appetite for better investment returns, many Malaysians have started investing offshore (In part this is also due to the fact that Malaysia stock market is no longer favoured by foreigners and is lagging far behind stockmarkets in Hong Kong, China or even Singapore in both performance and liquidity).

If you are interested in investing in multiple key global markets, the one that instantly comes to my mind is Interactive Brokers (IB). IB offers a very comprehensive list of financial markets to invest in, ranging from North America (U.S, Canada, Mexico) to Europe and Asia Pacific (Australia, Hong Kong, India and Japan) region. The products offered are also wide ranging, from equity to forex, derivatives, bonds, ETFs, CFDs and so on.

IB's brokerage rate is also one of the lowest available. For instance, to trade in U.S. stocks, the brokerage charge is only US$0.50 per lot (of 100 shares) with a minimum $1 brokerage per order!

Application for an account can be done easily through the web (online). Even Agreements can be digitally "signed" online! The only manual work which you need to provide them is a copy of your Passport and a signed copy of certain local Authority Form such as W-8BEN in the case of trading in U.S. For added convenience, you may fax them a copy of these documents or simply scan and email a copy to them.

One word of caution though, the trading software for IB is not that user friendly. So it may take some time for you to get used to it. However, step-by-step guides are readily available from their website. All you need to do is to run the videos.

For those who are interested in trading in the U.S. market only, my preferred broker is ThinkorSwim (ToS). Brokerage rate is higher at $1.50 per lot or fixed at $9.95 per trade (whichever is lower and subject to a maximum of 50 lots for fixed rate) but the trading software is much more user friendly and feature packed. Among them include the ability to display multiple chart patterns all in one screen.

The beauty about these online brokers is that you can also do virtual trading, that is, trade without real money! This will give you a sense of better confidence before starting real trades, and is ideal for beginners who would like to get familiarise with the trading platform and/or test certain trading strategies.

To start real trading, you will need to deposit funds first into the trading account. In other words, there is no more T+x day type of settlement. All trades are cash up front but you may choose to trade with a margin facility.

Funds can be easily transferred from your local banking account to the U.S. designated account using wired transfer or more commonly known as Telegraphic Transfer (TT) in Malaysia. You will need to bear the TT charges (charged by both local and foreign banks) as you do the transfer. Just inform the broker about the transfer and they will notify you once the amount is successfully banked in. Normally, this should happen within the same business day.

Trading platform is much more sophisticated compared to our local markets as you can literally set your trading criteria (e.g., entry price, stop loss and profit target) and walk away without ever watching the screen again! You can even set orders such as market order, stop order with or without limit and OCO (One Cancel Other) orders. Once you learn how to do it, trading is very easy and a peace of mind in case you are busy at work or go to sleep!

Other than signing up with online brokers, the other viable option is to trade via your local investment bankers or stock brokers. A number of local Investment brokers have for the past couple of years rollout offshore trading in order to cater for this increased interests. Among the Investment Brokers offering this service include CIMB, OSK, Kenanga, Maybank and RHB Investment Bank.

However, do take note that this type of trading is not done online. The arrangement is between yourself and your local broker. Orders can be instructed by you and your broker will forward the trade instruction with their respective counterpart in the particular country of trade. Exchange rate is determined by the broker on the day of trade. There is no standard brokerage rates apply so you will need to verify with your preferred broker before trading. There will also be some signing of paperwork required before you want to start trading offshore.

Generally, this type of 3rd party or indirect trading will be more costly than online trading. It will probably be fine if you do not intend to trade offshore frequently and do not have the time or patience to learn a new trading platform. Also bear in mind that there will be a delayed trading execution given the offline mode of instruction and involvement of 3rd party.

Rich Dad Poor Dad With A Twist..

Many people are familiar with the book Rich Dad Poor Dad authored by Robert Kiyosaki.

Here's a different twist with a different perspective on who's rich and who's poor.

One day, the father of a very wealthy family took his son on a trip to the country with the express purpose of showing him how poor people live. They spent a couple of days and nights on the farm of what would be considered a very poor family.

On their return from their trip, the father asked his son.
Father: "How was the trip?"
Son: "It was great, Dad."
Father: "Did you see how poor people live?"
Son: "Oh yeah."
Father: "So, tell me, what you learned from the trip?"
Son: "I saw that we have one dog and they had four. We have a pool that reaches to the middle of our garden and they have a creek that has no end; We have servants who serve us, but they serve others; We buy our food, but they grow theirs; We have walls around our property to protect us; they have friends to protect them."
The Father was speechless, before the son added: "Thanks Dad for showing me how poor we are!"

A different perspective may change our way of life and success, for the better forever.

Do you have a story? Please share.

Is Michael Jackson Worth Investing?

The news of Michael Jackson's death has caught many people by surprise. Right after the news were released, the memorabilia market instantly heated up. Copies of his best-selling album, "Thriller", worth normally US$10, were fetching 5 to 15 times more thereafter!

Bizarrely, a single Cheeto, a cheese-flavored, finger-sized snack, that purportedly resembled Jackson doing the moonwalk was sold for $35.18 on eBay on Jun 25th!

Prices for all things Jackson, from albums and tour posters to commemorative coins and more, popped up like a champagne cork and have shown little sign of coming back to earth.

People are so overcome with emotion that they are willing to pay almost anything rather than thinking they should wait for the spike in prices to disappear.

Other groups of people are now either looking to cashing in all things Jackson related or investing (buying) with the hope of holding on to it for future gain.

But this will come back to reality soon, most likely when the news stop producing Jackson's headlines or when people get tired of it. People are often fickle minded after all! They will move on to the next major headline after some time.

For the matter, anyone thinking of Jackson memorabilia as an investment, or with a spare copy of Thriller gathering dust in the basement, may want to move it now because the market is never likely to be this hot again.

However, if someone does hold on to something genuinely unique or rare items of Jackson's, then perhaps there is a higher chance that these unique or rare items can fetch a much higher price in the future. The same principle, however, is unlikely applicable to something like Jackson's Albums (eg., Thriller) though, where there were huge production supply in the market.

Also watch out for items that are fake or scam!

Ultimately, people should return to their senses.

Nevertheless, Michael, thank you for bringing to us your special brand of music and entertainment that will live with us forever!

For those who would like to catch a glimpse of one of Jackson's final moments, watch
this video of Michael Jackson's last concert rehearsal on June 23 2009, two days before his death, at the Staples Center in Los Angeles.

Liberalisation or Desperate Measure?

Finally, the 30% quota Bumiputera (Native) requirement for new listing of public companies in Malaysia has been abolished by the Government of Malaysia! This is in the wake of the country's diminishing competitiveness and the continued diminishing foreign interest in Malaysia's capital market. The Government labels the move as an economic liberatisation. To me it's more like a desperate measure (against potential political flak) to salvage the alarming situation!

Let's take a closer look at the equity side. The current weightings of 2.2% of foreign funds in Malaysia (as a percentage of their Emerging Asia exposure) pales in comparison to its own historical averages of 3.7% post crisis and 4.0% in the preceding upcycle of 2003-07. The resulting ratios of current exposure to previous historical averages are therefore the lowest ever recorded! (Source: CIMB Research).

Despite the recent 20+% market rally in Malaysia, the support is primarily coming from local funds. This shows that Malaysia market has been ignored by foreign investors thus far in this run up, and the exposure is clearly on a downtrend rather than up!

Nevertheless, with the new measure, what this has done is that it has freed both Malaysian and foreign entrepreneurs from having to worry about obtaining a 30% bumiputra equity participation before they can expand their businesses.

The 30% bumiputra equity requirement thus is no more an administrative micro target. Instead the government will keep that as an overall macro target leaving it to regulators in the respective sectors to decide how to do it.

The significance of this becomes more apparent if one considers the listing process. Previously, one had to get a 30% bumiputra partner and then float at least 25% of the issued capital on the market through an IPO. That effectively meant that a majority of 55% stake had to be given up!

If the bumiputra investors subsequently sold out, the major shareholder will most likely be required to top up the bumiputra equity stake at the next fund-raising exercise.

Now, all it takes is a 25% public float of which half or 12.5% of equity capital will be allocated to bumiputras via a public balloting process. If not enough bumiputra participants have applied, the bumiputra requirement is deemed to have been met.

Also all listed companies do not have to periodically increase their bumiputra stakes to previous levels when these are sold down, thus eliminating a recurrent headache!

A more interesting public statistics shows that of the RM54bil of equity distributed to bumiputras through these means between 1984 and 2005, only RM2bil are still in bumiputras' hands!

On the other hand, all property transactions, except for those involving a dilution of government or bumiputra interests for property valued at RM20mil and above, would no longer require Foreign Investment Committee (FIC) approval.

The role of FIC has also become obsolete...Way overdue!

The world is getting flat....It's time to heed the wake up call or face elimination!