Wednesday, December 26, 2012

Stock Market record new high, so what's your result?

Index is breaking the all time high record! Maybe we need to thanks the hot money “created” by US, seem now already spread the effect, especially for Asia stock markets, from Hong Kong to Taiwan, Singapore, Thailand, Indonesia and Malaysia.

However, you would be surprised if I tell you many investors are not making money, some even lost money in their trade. Why? And how could this happen when market is bull run?

Unfortunately, this is what really happen in retail investors. School never teach how to invest like a millionaire. After all, if there's a school, I don't think there would be any millionaire teacher willing to teach those new bee how to earn their fortune in the stock market. What we could find are those half pass six teacher, so what kind of result can you expect?

In fact, investment is similar to swimming. You can not and also dare not trust the advice from your friends or teacher. Furthermore, you may not know what they told is right or wrong, it could be another stupid idea! Therefore, most investor like to try an error in order to gain the “experience”. I call this as a school fee / tuition fee that one need to pay in order to learn the investment lesson. How big or small the “fee”, it's all depend on your decision.

I paid a 5 digit amount for my “tuition fee” in my earlier part of investment life. It was a big amount and I treat it as my very first investment lesson on “why I lose money in stock market”. Till today, I still record down this important “lesson”, to remind me not to do the similar mistake again.

For those who started to invest in stock market 10 years ago, if you have yet to learn the lesson, my advice is, don't invest anymore, better put your hard earn money in the bank's FD. If you are curious what are the lesson that I learn:
First, never buy a stock base on tips or rumours.
Second, never buy the troublesome company.
Sound simple ya, but if you don't believe me, go ahead to buy a stock base on hot tips, or buy a cheap company that going to burst... almost 90% I am sure you going to pay for it! 

Sunday, December 9, 2012

How the Margin account work?

Margin account is one of the way for those qualify to borrow money against your existing stocks to buy more stocks. Different broker will establishes different margin of maintenance requirement.

For example, if you deposit $20,000, you would have $50,000 of buying power. (some broker give 2.8x, which make the buying power as $56,000) You can margin up to 60% of your stock price (some time 65%), in other words, you use $20,000 of your own money and broker will loan you $30,000. If 65% of margin, then the high side you can borrow is $33,000. Some stock may have lower limit (cap price less than 1), hence the securities value will become less. Let assume we buy 10,000 shares of a stock at $5 per share and below are some of the possible scenarios.

Scenario 1: Cap price 1 and stock price flag
The 10,000 shares still worth $50,000 (securities value). In this case, there's no margin call as margin is 60% (money borrow $30k divide by securities value $50k), however, you lose out, as you need to pay for the interest of $30k.

Scenario 2: If cap price 0.90 and stock price flag
In this case, the securities value worth $45,000 only although the actual market value is $50,000. When the broker calculate the margin, it would become 66% (money borrow $30k divide by securities value $45k). This leave no room for the investor as once the stock price goes below $5, margin call will follow.

Scenario 3: Cap price 1 and stock price goes south to $4
The 10,000 shares now worth $40,000 (securities value). In this case, when the broker calculate the margin, it would become 75%. Margin call will follow and investor will need to top up $6153 to reduce the margin to 60% or the broker will force sell some stock to make the margin become 60%.

Scenario 4: Cap price 1 and stock price goes up to $6
The 10,000 shares now worth $60,000 (securities value). Investor can withdraw $9,000 or buy additional stocks with this value. Another option, sell the stock at $60,000 and return the broker $30,000, a nice return base on initial deposit of $20,000.

Below are some of the important lesson one need to learn from margin account:

  • margin amplifies a portfolio's performance, make losses and gains greater than they would have been.
  • All securities in account are held as collateral for margin loan
  • If you fail to meet the margin call, the broker may sell off some or all your investment to cover the margin requirement
  • It is possible to lose more than you invest when using margin.
  • Use margin account to buy stable blue chip stocks with cap price equal to 1 is better than cap price below 1.
  • Interest rate charged by broker, terms and conditions may subject to change

Some people say, margin account is a two-edged sword. It's a great deal if the stock goes up, but a disaster if the stocks goes down. It's definitely not suitable for beginners as it involve market risk and need to follow strictly on tight money management.

Saturday, December 1, 2012

SP Setia, could be right time to invest?

Most investors would like to seek for stock tips, normally I seldom provide any. The reason is many people don't understand how to handle it, hence, many time Mr A is making money whereas Mr B is losing money though they bought the same stock, just because of the timing and experience make the different.

Recently there is a stock, SP Setia which fall about 18% in share price for the last few days to close at RM3.05 last Friday. You can treat this as stock tips on how to trade it. I think this one is a good example to study and at the same time, trade it to make pocket money. First, let study what could be the reason for it share price to fall?

According to some analysis, the main reason could be the foreign fund were selling due to the stock being removed from the MSCI Malaysia Index. Further add on to this is because of general election mood, many investors may stay sideline, wait and see first.

Investors may also want to find out if the company turn bad? Or if the profit in the decreasing mode? If the answer is no, then it's worth to take a look. It's similar to as if someone is selling their house at below market price in your area, do you need to feel panic or fear, it could be an opportunity to make money!

What's the prospect of the company, is the profit look good in next few years? The answer is sure, among the most recent projects, they have joint venture with Sime Darby Bhd and EPF to develop the 39 acres freehold Battersea power station in London with value about RM39.4 billion. Next on hand project is new integrated health and research institute (1NIH), measuring about 41 acres. This projects will give positive earning figure and keep the business going for few years.

Investors will get the dividend of about 4.8% at current share price of RM3.05. Base on the EPS of 20.8 cents, the PE is about 15x. Many stock brokers give target price of above RM4.00. However, for margin of safety purpose, I will give a discount of 15% from their target price, hence RM3.28 to RM3.40 is not a problem for short term investors.

For those Technical Analysis (TA) supporter, currently the share price is approaching Fibonacci level of 261.8%, hence we could see the technical support at the level of around RM3.00 (plus minus 5 cents). Once most of the TA supporter believe what they see in the chat, it will become strong support at current level, hence more traders will follow and forming buying support at current level. Though sometime I don't really like the TA, however, when you see the high volume appear at the bottom, it may hint, hey, it's time to buy!
Note: In addition to my disclaimer clause in my blog, I hereby confirm I have bought SP Setia recently at RM2.99 and RM3.00 level and had been trading for few rounds at this level. For the time being, RM3.00 is a good support, I feel that 5% or more profit for short term is not a problem. In cases if the stock price fall to RM2.80 or below, execute a cut lost plan.