Sunday, February 26, 2012

Misconception About Penny Stock Prices

Many people like to purchase only low priced/penny stocks because they offer higher potential gains. A common phase we hear is "I like to buy 10-20 cents stocks because I can double easily and I will make a 100% profit".

Hey, "stocks are priced low for a reason, just as stocks priced high are there for a reason".

Like anything in life, quality is never offered at a discount. Eg. When you are in the market for a car, you don't expect to purchase a Mercedes for the price of a second-hand Proton Saga.

Stocks are valued at their current market value or perceived value under the current situations. A 10 cent stock is trading at this level because it is only worth this much in investor's eyes. A stock priced at $10 or $20 is trading at these levels because of a quality that the lower priced stock does not have. Institutions, such as mutual funds, will not purchase a stock at 10 cent based on strict internal rules and fund guidelines. Stocks move based on vast amounts of support from institutions that have the buying power to propel prices 100%, 200% or more in less than 12 months.

A quick study of stock market history will prove that the majority of stocks priced at $2 or less will be de-listed or bankrupt before they ever give an investor a triple digit return.

High quality stocks are typically representative of high quality companies that usually have innovative products or services that are increasing revenues and earnings thus peaking institutional interest. We have seen many such stocks double or triple during the past 5 years.

Always buy the stock that presents the highest probability of success based on both fundamental and technical analysis. The price should never matter nor should the lot size. A 25% gain will always be the same whether you buy a $2 stock with 5000 shares or a $100 stock with 100 shares.

Is Income from Shares Investment Taxable?

After having received money (cash dividend) from your shares investment, have you considered whether the receipts are taxable?

In general, people are under the impression that dividend income is not required to be reported in the tax return. This is only true provided the dividend income is tax exempt as in the case where the dividend that is received is either a single tier dividend or is paid out of the exempt profits of the dividend-paying company.

In the case where you received dividends where income tax has been deducted at source, such dividend income is taxable and consequently has to be declared in your income tax return.

Depending on your level of taxable income, you may actually obtain a tax refund from the Inland Revenue Board (IRB) if your tax bracket is at 24% or below.

Generally, the tax deducted by the company on the taxable dividend is at the rate of 25%. On the other hand, if your tax bracket is at 27%, then you are required to pay the 2% differential to the IRB.

In order to determine whether your dividend income is taxable or otherwise, you can look at the dividend vouchers. However, one common mistake in the reporting of taxable dividend income is where the actual amount received is declared as opposed to the gross dividend income, as stated in the dividend voucher.

Saturday, February 25, 2012

Regulated Short Selling (RSS) on Bursa Malaysia

Basically, short selling means that investors sell a share without first having it. Short selling is a technique used by investors to profit from the falling price of an overpriced market.

In Bursa Malaysia, short selling is regulated under Regulated Short Selling (RSS) and Securities Borrowing and Lending (SBL) guidelines, which introduced to the market on 3rd January 2007. Prior to 2006, short selling was banned for about 8 years.

RSS means that investors sell a share without first having it, but they have to borrow it from the Central Lending Agency (CLA). CLA is an agency managed by Bursa Clearing where all lending and borrowing are taking place. Investors don’t deal directly with the CLA, but they have to go through the approved Participating Organisation (PO) or investment bank.

For those who have excess shares, you may lend it to the CLA and earn some fees.

1. How to participate in RSS?

Investor who wishes to participate in RSS must open a designated RSS trading account with a PO. All short selling transactions are to be executed through a RSS Account.

Prior to executing RSS, investors must first borrow the stocks from the CLA through the approved PO. Investors have to pay a fee and placing sufficient collaterals for borrowing.

Upon successfully borrowed the required stock, RSS will be executed by dealers at PO after receiving instruction from the investors. The order price must be higher than the last traded price of the relevant stocks. This is known as the ‘up-tick rule‘.

2. Which stocks are approved for RSS

Please refer to Bursa's website.

3. Suspension of RSS

Total short position of an approved stocks is limited to 10% of the total number of the shares. When the limit reach, RSS activities on that stocks will be suspended for 4 market days.

4. More informations

Please refer to Bursa's website.

Direct CDS vs Nominee CDS Account

When opening a trading account with a Broker (Participating Organization) or a Bank, a CDS account will be opened at the same time. Normally, Brokers can offer Direct CDS or Nominee CDS Account but Banks can only offers Nominee CDS Account.

CDS stand for “Central Depository System” and it maintain by Bursa Malaysia Depository Sdn Bhd. Previously it was known as Malaysian Central Depository (“MCD”).

Each CDS account have its own advantage and disadvantage. Below are the different between the two:-

Direct CDS Account
Account Name - Under shareholder name (eg Mr Lee)
IPO application - Eligible
Paperwork on corporate exercise - Handle by shareholder
Dividend - Send to shareholder or eDividend
Attending AGM - Eligible
Annual Report - Mail to shareholder
Share transfer - To own or relative account

Nominee CDS Account
Account Name - Under Broker/Bank Name (eg CIMB Nominee Tempatan for/Pledged Securities Account for Mr Lee)
IPO application - Not eligible
Paperwork on corporate action - Handled by Broker/Bank
Dividend - Credited to trust/share account
Attending AGM - Not Eligible (but can get Broker/Bank to appoint as proxy)
Annual Report - Have to request from Broker/Bank
Share transfer - Only to own account

By looking at the above, it is clear that Direct CDS account have more advantage when compare to Nominee CDS account. The only advantage of Nominee CDS account is shareholder do not need to worry about paperwork on corporate exercise.

Thursday, February 23, 2012

How to Calculate Gearing, Premium & Cash Settlement for Call Warrants?

Call Warrant is an alternative investment that investor can invest in Bursa Malaysia. It can be traded through remisiers, banks’ dealers or via online trading, which is similar to trading shares.

The advantage of call warrants is that, it has unlimited upside (gain) similar to buying the underlying asset, but the loss is limited to the amount initially invested in the call warrant.

In order to make trading decision, normally investors look at gearing, premium, cash settlement & expiry date.

Below is the formula to how calculate call warrant gearing, premium and cash settlement:-

Gearing = Underlying Price/(Warrant Price x Exercise Ratio)

Premium = {[(Warrant price x Exercise Ratio) + Exercise Price] – Underlying Price)}/Underlying Price

Cash Settlement = No of Call Warrants x (1/ Exercise Ratio) x (Closing Price – Exercise Price)

Wednesday, February 22, 2012

Gold Investment in Malaysia

Gold is the best possible hedge against inflation? So where to go for gold investment in Malaysia? Basically, there are few local banks such as Maybank and Public Bank are offering gold investment using passbook savings account concept.

It means a passbook will be given to the gold investors and every purchase or sale order will be recorded in the passbook. It is just functions exactly same like your conventional passbook savings account. Every transaction of either bank in or withdrawal of your money from the savings account will be recorded in the passbook.

There are however, not much of different between the banks except some offers better spread and/or freebies.

Hey, do your homework before investing...

Price Stabilizing Manager in IPO

Under the Capital Market and Services (Price Stabilizing Mechanism) Regulations 2008, an Initial Public Offering (IPO) issuer may appoint a stabilizing manager, who may undertake stabilizing action in an attempt to prevent or minimize the reduction in the stock’s price.

The stabilizing manager will normally, buy back the shares at the offer price if the market price of the share drops below the offering price to support the IPO’s stock price from the first 30 days of the trading debut. The shares will then, return back to the issuer.

If you think that it is quite safe to buy into IPOs that have price stabilizing managers, you may be wrong as:

- the stock’s price is not freely determined by market forces and may imply a certain form of “price manipulation”

- the post-IPO price may not reflect the true value of a company

- you will not know how long the manager will continue to support the share price and what will happen to the stock’s price once the manager stops supporting the price of the stock

Notes: Please understand that not all of newly listed companies have price stabilizing managers. Most of the time, only big IPO issues appoint stabilizing manager.

PN17 stock? Should you sell or buy?

PN17 stands for Practice Note 17/2005 and is issued by Bursa Malaysia. In general, PN17 companies normally have some financial difficulties.

A rational investor will look for companies with good business fundamentals to invest in and we believe that most investors know which companies have good fundamentals.

Don’t tend to listen to market rumours and buy into companies with poor fundamentals or are speculative in nature with hope that the stock prices will recover. Cut the losses and never average down the purchase prices on these companies.