Understanding the basics of trading shares

Gaining market insights and making the right decisions comes with time and experience, as well as listening to the right advice


WE HAVE long been told the benefits of investing in the stock market, from deploying idle cash to make a lucrative profit to generating additional savings for the future.

In Malaysia, the latter is especially pertinent as low wages and early withdrawals from pre-retirement accounts have seen a vast number of citizens having insufficient retirement savings to cope with the rising cost of living and high household debt.

For the prospective investor who would like to wet his or her beak in the world of financial markets, the random series of company names or securities abbreviations in the various colourful lights on the trading screen, while alluring, are not particularly informative.

Here are some basic steps to do if one would like to foray into the world of investing in securities on the local stock exchange, Bursa Malaysia.

Getting Started

The first step to investing in stocks or securities like exchange-traded funds or retail bonds, is to open a trading account with a broker or investment bank that is registered with the Securities Commission of Malaysia.

You will need a Central Depository System (CDS) account which will hold your ownership of shares, while allowing you to buy and sell securities.

To do so, you will need to engage with a participation organisation (brokerage firm) who will then connect you with a licensed dealer or remisier.

You are typically required to provide a copy of your identification card and latest bank statement, as well as other relevant documents such as your recent salary slip, employee’s annual income statement form and utility bill, to open an account with a brokerage firm.

You will also need to complete a registration form and choose the type of trading account you want. Most brokers allow you to complete these processes online now.

You will need to pay a small fee to open the CDS account before you can deposit funds into your trading account with the broker.

Rakuten Trade Sdn Bhd, which is credited as being Malaysia’s first completely online equities broker, now notifies investors within two hours if their application to open a trading account was successful after completing the necessary requirements on its platform.

If choosing to trade online, you will get market access via the brokers trading platform, while those preferring to go through remisiers will be given a contact person to call and place his or her orders through.

The brokers offer two types of accounts, namely cash upfront trading or a contra account, to investors.

Cash upfront trading functions similarly to a debit card as it allows you to buy and sell shares using available funds in your trading account.

The contra account is like a charge card, whereby users are extended a spending limit based on the shares and cash placed as collateral.

Contra trading is basically the buying and selling of shares without paying for them for a couple of days. If your entry cost is higher than the exit cost, you will incur a contra loss which the account holder will have to settle with his or her broker within a given time.

Inversely, if your sell proceeds are higher than the buy costs, the contra profit will be paid to the client or kept in his account for future trades.

Note that contra trading is not a right of the trader, but a privilege accorded by a stockbroking company to its clients.

Traders are required to fully settle their transaction within two trading days as part of Bursa Malaysia Bhd’s recent shift to the shorter T+2 trading cycle.

Note the brokerage charges trading online are usually cheaper than trades done through remisiers. The remisier is, however, generally a better option for investors seeking some guidance.

In addition to the cost of the company shares or securities traded, transaction costs include brokers’ commission, stamp-duty and clearing fees.

As broker fees vary from brokerage to brokerage, check around for the most competitive rates offered.

A check on its website reveals an RM8 brokerage fee for Rakuten Trade’s contra and cash upfront accounts for transactions valued below RM10,000, while the maximum RM100 fee applies to transactions worth RM100,000 and above.

Risk Appetite

Before getting into the nitty-gritty of trading in the stock market, it is important to first determine your risk appetite and financial goals.

Risk appetite basically refers to the amount of fluctuations or variability from your investment entry point that you are both willing and able to withstand.

While the seasoned long-term investor will likely be unperturbed by a short-term equity rout, those who are new to the market may prefer a low risk stable investment that performs even during an economic slowdown.

These, in the language of the market, are typically called defensive stocks as they provide sustainable returns to investors in terms of dividends even if the returns the companies make may moderate, based on sector economics and the business cycle the company is exposed to.

It is also ideal to have some knowledge on how to balance or hedge your risk by investing in other assets such as gold and derivative contracts.

Navigating these different considerations can be tricky, especially for the first-time investor, so it is important to find the right broker that suits your needs.

You need to consider if the brokerage firm you are looking at cater to retail investors? Do they provide investment ideas and research notes that better inform your investment decisions?

Alternatively, you can consider investing into a unit trust or a fund manager and, in this day and age, utilise robo-advisors such as “StashAway” which provides more flexibility in terms of start-up costs and risk portfolios.

Such investment platforms come with an annual management fees, but competition is making these rates more attractive.

Apart from broker fees, a stamp duty of RM1 is applied for every RM1,000 of the transaction value, but is remitted to a maximum RM200.

Listed companies with a market capitalisation between RM200 million and RM2 billion as of Dec 31 last year are exempt from this stamp duty in 2019.

This includes stocks such as Ekovest Bhd, AirAsia X Bhd and Berjaya Corp Bhd.

Lastly, a clearing fee of 0.03% of the transaction value of a direct business contract is applicable with a maximum of RM1,000 per contract and a minimum of RM10 per contract. The same rate applies for novated contracts but no minimum fee is imposed.

When trading securities online or through remisiers, all orders are keyed into the Automated Trading System at the participating stockbroking company and are matched automatically by the system.

The price of every order is determined by supply and demand forces which are gauged by the amount of bids and offers coming in. In every transaction, the security is sold to the highest bidder and purchased at the lowest offer.

Once the order is matched, a trade confirmation is printed out with details such as the original order number, stock number, price and quantity matched, as well as details on the counterparty brokerage firm.

Stock prices are driven by underlying fundamental and partly technical factors

These are just the basics of starting up a trading account and how to go about trading shares on the local stock exchange.

Gaining market insights and making the right decisions comes with time and experience, as well as listening to the right advice.