Costs of investing in equities
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- It is important to consider the charges incurred when investing as costs will eat into the returns.
- For investments using cash, brokerage commission, clearing and trading fees as well as GST will be incurred.
- In addition, using CPF funds to invest will incur other settlement, agent, and recurring fees.
Cost is an important factor that some retail investors fail to consider when investing. These costs can take several forms and may not be apparent as they could be embedded in the product. They may also vary when investing in different financial instruments such as equities, exchange-traded funds (ETFs) and unit trusts.
It is worth your while to do your due diligence to be aware of the charges incurred when making investments. Remember that the lower the cost, the higher the potential returns.
For example, let’s assume that an investor holds 10,000 shares in a listed entity and decides to close this position exactly one year later. During this period, no dividends were declared but share prices appreciated by 10%.
Without factoring in costs, it might be assumed that the investor has made a 10% gain. However, the actual returns on the investment would be lower due to tangible and intangible costs incurred.
Tangible costs are those which are apparent, quantifiable, and charged directly on the investment amount, such as commission fees paid to the broker. Intangible costs are usually embedded or deducted from the value of the investment and not from the original investment amount. They are easily overlooked by new investors, who may get a shock upon only realising the fees involved after they have placed their first trades.
Brokerage commission fees
The most common of these are commission fees paid to brokers for facilitating trade-related transactions. These can take two forms – front-end load and back-end load.
A front-end load is charged at the initial point of the investment. This happens when you buy equities like stocks and Real Estate Investment Trusts (Reits). On the other hand, back-end fees are incurred when you sell or close your position.
Depending on the size of the contract, commission is charged as either a flat fee or as a percentage of the total investment amount.
Most brokerages in Singapore charge a minimum fee for all transactions. Depending on the brokerage, this can range from $12-25 for Central Depository (CDP) linked accounts. Simply put, brokerages will charge commission fees of between 0.08% and 0.28% for contract values below $50,000 or the base fee, whichever is higher.
In general, commission fees are charged at a lower rate, the higher the pricing tier a contract falls in.
This is illustrated below:
In the example, assume a brokerage charges a minimum fee of $25 and a commission rate of 0.28%. If 1,000 shares of Stock A are purchased, instead of a commission fee of $8.40 being charged at a rate of 0.28%, the brokerage will charge the investor the minimum of $25. If the investor decides to purchase 10,000 shares of Stock A, the commission fee will be charged at 0.28% of the contract value or $84.
Other fees incurred
Commissions are not the only type of fees investors face.
Besides commission fees, other fees include platform fees, holding fees, clearing fees, trading fees, settlement fees and goods and services tax (GST).
For example, when you trade using CDP-linked accounts, a clearing fee of 0.0325% of the contract value is charged. In addition, there is also a trading fee of 0.0075% per contract. The prevailing GST rate of 7% is then charged on the total fee.
Consider an investor who has made the decision to purchase 10,000 shares in Stock A at $3 apiece. While the total outlay for the stocks would be $30,000, there will also be a commission fee of 0.28% of the contract value, a clearing fee, trading fee and prevailing GST charges on the fees charged.
In this example, the breakdown of the investment costs incurred are as follows:
A purchase of 10,000 shares of Stock A will thus incur $218.28 in fees and taxes.
Closing out this position will also incur costs which in turn will reduce the overall profits. In the same example, selling the entire position of 10,000 shares in Stock A at $3.30 per share would result in a total contract value of $33,000. This would net a profit of $3,000 excluding fees and tax.
After fees and taxes are factored in, the profits will be reduced as illustrated below:
Not considering fees, the gain from the investment would be S$3,000. However, due to the fees, gains from the investment only amount to $2,887.01. Overall, front-end and back-end loads have lowered profit from 10% to 9.2%.
Investing in equities using CPF funds
Other than purchasing equities with cash, you can also use the funds in your CPF Ordinary Account (OA) and Special Account. To do this, you would need to open a CPF Investment Account with an approved CPF Investment Scheme (CPFIS) agent like DBS Bank.
Using your CPF funds to pay for investments will incur additional costs on top of the ones discussed so far. This includes a CDP settlement fee of 35 cents per transaction, which the CPFIS agent will collect on behalf of CDP.
Further upfront costs include agents charging up to $2.50 per 1,000 shares or units, with a maximum charge of $25 per transaction.
This article covers the cost of investing in equities and is one of four articles in our series common investment fees. The other articles can be found here:
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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.
All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.
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