Deciding to trade

Most shares traders-to-be have one thing in mind: money or the greed of it. To put it in more sophisticated terms: seeking financial freedom. There is nothing wrong with the motive but it can seriously impair your judgement and cause heavy losses because of it.

Before a newbie puts in his/her first trade, there are some questions that they should seriously ask themselves.

1)Can I take risk?
All shares investments carry risk whether in the long term or short. Even the most experienced or the best equiped trader is not exempted from risk. Unless you have a trading volume of tens of millions or can influence the market with actions of yours, then perhaps you are more free of risk than others. Even if you belong to this category, think 911 and the aftermath effect on the stock market.

2)Do I have a sum of money large enough to trade and ready to lose?
Personally I do not encourage excessive use of leverage(allowing you to trade in amounts more than the amount of money you have) although I do employ them from time to time. It is essential that you have a sizable trading amount so that you reduce the impact of commission charges. Consider this:

standard commission charges in singapore:
brokerage commission: 0.28% , min $25
CDP clearing fee :0.04%
SGX access fees :0.0075%
GST on the total charges: 7%

Suppose you buy 5000 shares of company A at a price of $1,
Contract value= 5000 x $1 =$5000
brokerage fee= $25
clearing fee=$2
access fees=$0.375
GST 7%= $1.92
You need to pay= $5029.29

Thus you can see that the commission is about $30 for a contract size of $5000. Note that if you are trading for profit, you need to sell off your contract eventually,so you have to take into account your commission charges for selling as well.

Therefore suppose you are short-term trader and you are aiming to get a 3% gain on the share price. For the contract size of $5000, your gross profit will be $150. After buy and sell commissions, your net profit will be about $90.

However if your contract size is only $1000, 3% increment will give $30. Commission will be at least $50++ since the minimum broker commission for each buy/sell contract is $25. See the picture?

3)How much limit do I take?
As long as you are not trading in penny stock, it is prudent to use a stop loss of 6-8%. Which means that you are setting a maximum loss target for yourself. This is to provide discipline to your trading so as not to hold a falling stock for too long.

First of all ask yourself how much you can lose?if your maximum tolerable limit is $600, then a rough limit you can take should be about $100000. This does not mean that you should put everything into 1 single contract.


The Material provided above is for information only and does not constitute an offer or solicitation to purchase or sell the shares mentioned