Opening a trading account
Buying/Selling stocks
Stocks are traded on stock exchanges. Individual investors generally need to
make use of the services of a stock broker to buy/sell shares. Stock brokers
carry out transactions on the behalf of clients for a commission.
Individuals who want to transact in
shares should open an account with a stock broker.
Bid-Ask Spread
Stock brokers charge clients a commission for executing their trades. They also
earn money from the bid-ask spread. Example – If you ask a broker for a quote
for 1 share of Citi and receive the following price: “3.10, 3.20”, it means that
the broker is willing to buy(from you) 1 share of Citi for $3.10 and sell(to
you) 1 share of Citi for $3.20.
Here, the bid price is $3.10 and the
ask price is $3.20.Notice that if the
broker buys 1 share at $ 3.10 and sells it at $3.20, she will make a profit of
$0.10 . This difference in the ask price and the bid price is known as the
bid-ask spread.
Brokers
Cost is a very important consideration in choosing a broker as commissions and
spreads can add up to a substantial sum especially for active traders. Most
brokers allow clients to place orders online or via telephone. Deep Discount
brokers charge very low commissions and can provide reasonable execution. Most
brokers also offer access to global markets. Therefore, it should be possible
for a trader based in Singapore to buy stocks traded on the NYSE through his
broker in Singapore.
Costs
Commissions typically amount to about 0.25% of the value of the trade. The catch
here is that most brokerages charge a “minimum commission”. That would imply
that the client could end up paying $20 as commission for buying a stock worth
$1. Minimum commissions vary across countries. They typically stand at around
US$10 in USA, SGD 25 in
Singapore and INR 25-50 in
India.* Some
brokers offer very good “per-trade” rates subject to a minimum number of trades
every month.
The broker not only executes trades on the client’s behalf but can also provide
research reports that help clients make better trading decisions. Different
levels of service are available for different fees. These usually pertain to
trade execution and research reports. In my opinion, beginners need not lose
sleep over these details.
Some Brokers
USA:
Charles Schwab, E-Trade
Singapore:
Kim Eng Securities, CIMB
India:
HDFC Securities, ICICI Securities
*Clients should contact their brokers for detailed information in this regard
Next: Stocks