Posted: 23 September 2021
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In an attempt to broaden The Hatch Fund’s reader base, this article serves as a short primer on how to get started with investing. It is aimed at getting people to explore and think more deeply about the topic of personal finance, saving and investing. So if investing is new to you, you have come to the right place. I will keep the information as easy to understand as possible to help you get started on your investing journey.
1. What is a Brokerage?
Now that you know the reasons to invest and the various asset classes that you can invest in, the next step is to setup a brokerage account to get you started on your investing journey.
A brokerage account will allow you to buy and sell various financial instruments.
A brokerage is essentially a middleman that helps to facilitate a transaction by connecting buyers and sellers. Brokerages perform a few key functions that help people to invest / trade:
- Provide financial information, including pricing information, on their trading platform;
- Provides a trading platform or communication line for customers to buy or sell financial instruments;
- Execute trades on the financial markets on behalf of the customers, at their expense;
- Provide information about other market participants, making the correct decision for the client to conduct the transaction;
- Lending to clients for margin transactions; and
- Storage and protection of customer data
Here is a list of the most commonly used ones in Singapore: https://www.sgx.com/retail-brokers
Types of Brokerage
Broadly, there are two main types of brokerages – a full-service broker and an online broker. A full-service broker is a licensed financial broker-dealer firm that provides a large variety of services to its clients, including research and advice, retirement planning, tax tips, and much more.
An online broker facilitates buying and selling of a security over an electronic network. The transaction is usually effected through the broker’s proprietary trading platforms. Unlike a full-service broker, online brokerages do not provide value-added services like executing trades on behalf of clients, providing research or retirement planning. As a result, online brokers tend to have much lower commission fees and trading charges.
Currently, online brokers like Moo Moo and Tiger Brokers also offer libraries / learning resources that help investors to grow and learn as they invest with these brokerages.
Personally, I have accounts open with both types of brokerages. Apart from cost, the most striking difference is the relationship you have you with your assigned broker at a full-service brokerage firm. I really do appreciate the additional insights and research reports that the broker shares with me on a daily basis and I can see how valuable this can be especially if you do not have access to financial databases.
2. Factors to Consider when Opening a Brokerage Account
The first factor to consider is whether you want to own the shares in your own name. There are two types of accounts – (1) CDP account, and (2) custodian account.
In order for one to own SGX-listed securities in their own name, the securities must be deposited in a Central Depository Account, also known as “CDP”. This is the equivalent of a safe deposit which SGX uses to safekeep all the securities that you buy.
Conversely, one may choose to open a custodian account with a brokerage. In this case, securities purchased through these accounts will be held in custody by the brokerage, on behalf of its customer (you).
Here’s a good summary of what you are giving up if you choose a custodian account over a CDP account: https://dollarsandsense.sg/custodian-account-what-you-give-up-in-exchange-for-lower-commision-charges/
My suggestion is to just open a CDP account and link this to a reputable brokerage like DBS Vickers/ FSMOne/POEMS, and to open another custodian account with a broker of your choice. For long-term investments that you will invest more money in, you can buy with a CDP account so that you are kept up to date with the latest corporate actions, financial filings and AGM/EGM notifications. For the short-term trades, you can use the custodian accounts which will have lower fees.
The second factor to consider is fees. Every time you execute a buy order or a sell order, you will pay a small commission to the broker for helping to execute the trade. As such, it is important to take note of this when opening a brokerage account.
If you intend to trade very actively, you will want to go with a brokerage that offers no-commission trading or very low commission fees.
The third factor to consider is market access. Not all brokerages provide access to all exchanges around the world. The most common financial exchanges available to most brokerages in Singapore are Singapore Exchange (SGX), Hong Kong Exchange (HKex), New York Stock Exchange (NYSE) and NASDAQ.
However, if you want to invest in Australia (ASX), Japan (TSE), or London (LSE), you will have to check that your brokerage offers access to these markets. As such, this consideration should bear significant weight when you are looking for brokerages to sign up with.
The bottomline is that if you want to invest in Country X, the brokerage must be able to provide access to Country X (assuming there are no capital restriction regulations).
The fourth factor to consider is the types of products that you can buy on the exchange. These can include stocks, unit trusts, exchange traded funds (ETFs), CFDs, futures, options and bonds. Realistically, if you are new to investing, having access to stocks, ETFs and bonds should be more than enough for starters.
As you progress and learn more about financial products, then you may consider opening accounts with other brokerages that provide access to more niche products, such as options.
The fifth factor to consider to the access to “value-added services” such as research materials and daily insights / news updates. This may include equity research reports from the brokerage firm or other equity research firms and updates on companies that you have invested in. These services are typically associated with full-service brokerages which tend to charge higher fees.
The sixth factor to consider is the ‘user experience’ of the platform. Essentially, this refers to the ease of use of the platform to execute trade. Below are some questions you can consider when evaluating this factor:
- Does the platform make it easy to execute different types of orders (limit order, market order, stop order, etc.)?
- Is the interface intuitive to you?
- Does the platform provide a comprehensive tutorial that guides you?
- Do you intend to apply technical analysis? If so, does the platform have advanced charting tools that allows you do to technical analysis without leaving the platform?
- How much information does the platform provide on your investment target?
The best advice here is to open demo accounts and play around with them to see which one suits you best.
The last factor is whether the brokerage provides real-time price data.
Some brokerages provide price data with a 15-minute lag, while others provide real-time data. If your goal is to become a day trader, having real-time price data is definitely a necessity.
However, for general investment purposes, having real-time price information can be helpful in securing your buy/sell orders as well. For platforms with no real-time price data, there is a 15-minute lag before you get a confirmation on whether your trade was successfully executed. For such platforms, the current market price that you see is often the market price from 15 minutes ago. As such, it does not show the price movements reflecting any news that appeared in the past 15 minutes.
This is bad for decision making purposes as investors are under the false sense that what they are seeing is the actual market price. If a company happens to have an adverse news coverage/poor earnings results within the 15-minute window, its actual market price could have fallen drastically. But unbeknownst to the investor without real-time price-data, the platform may still be reflecting a market price that is much higher, causing the investor to buy at a much higher price.
As such, I personally believe in paying a little extra to get this feature. Even better, some brokerages already come equipped with this feature.
3. Conclusion
If you are totally new to investing, the bottom-line is to be cognizant of trading fees. Do not make the mistake of overtrading and unknowingly paying for lots of trading / commission fee as I did when I first started.
As a beginner, the best thing you can do for yourself is to have some practical experience. Hence, my advice is to start with a small amount and open an account with any no-commission / low fee brokerage to get started. The biggest hurdle is always taking the first step of setting up your account.
In subsequent articles, I will look to discuss various investment strategies that you can adopt, but until then let me leave you with some resources to get you started:
- Warren Buffett’s Investing Tips for People Who Don’t Follow the Stock Market, Motley Fool
- Warren Buffett’s / Charlie Munger’s 4 Principles of Investing
- The Acquirers Fund ETF: ZIG When The Market Zags
- Why diversification matters, Fidelity
Contact
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