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Sunday, March 10, 2013

The small investor

In the preceding post, we have partially defined the typical small investor as a tsupitero, an essentially ill-educated investor with meager who tries his luck in the capital markets with the hope of hitting it big (in terms of returns) on the basis of inadequate information.

That's a mouthful. In reality, the small investor ranges from totally uninformed and relies solely on tips, rumors and recommendations from his broker if he is into stocks, or on her banker and amigas where to park her money which is not of immediate use, if she is completely ignorant of the stock market. She is the type who in her desire to increase her returns, who could easily fall prey to get-rich-quick or Ponzi schemes, more commonly known as pyramiding.

But a more technical classification would be in terms of the amount he could spare to "play" in the stock market.  For now, we will not concern ourselves with the ultimate objective of the investor on how he will use this money in the future, although the professional financial advisor would insist to know the investor's objectives and time frame.

What is the minimum decent amount one could spare in order to be considered a small investor?

Let us look at the possibilities where he could invest his money. For those merely looking at returns higher than a savings account, his friendly banker (usually the front office employee of a bank) would suggest putting some amount into the bank's UITF, or Unit  Investment Trust Fund which is essentially a pooled amount from the depositors and invested by the bank in higher yielding instruments such as Treasury bills and other money market placements. For the more sophisticated, the bank could offer mutual funds of which there are several types, depending on how the pooled money is allocated. These range from fixed income, balanced and equity funds, each of which has certain characteristics and degree of risk. Most of the time the average small investor does not want to be bothered where it is invested. All he wants to know is the potential return.

All of these are passive investments because you let somebody anonymous to invest the money for you at a cost which is a fraction of the amount invested. What's the minimum? Normally, 5 or 10 thousand pesos, although I have seen some UITF accepting as low as 1K.

At the racetrack, er, stock market, you can purchase stocks by a minimum board lot, which is the minimum number of shares you can buy for a given security (stock) of a listed company. The board lot can vary depending on the current price of the shares of the company. For stocks trading about  one peso per share (of which most are) or less, the board lot is 10,000; higher than that, say up to the double digits (price), the board lot progressively drops to 1,000 then 100. At the extreme high end, at the current trading of P2,900 a share, the board lot for PLDT (PSE:TEL) is mere 5 shares. At the lower end, the so-called penny stocks (centavo stocks?) which trade well below 10 centavos, sometimes below 0.01, the board lot goes up to 100,000.

So, for a minimum board lot, you are set back by 5K to 15 K, more or less. There is the so-called odd lot, or tingi-tingi but let us not be distracted by that complication.

By law, any company wishing to be listed at the stock exchange through an initial public offering or IPO, must set aside 10% of the offered shares for the small investors (that's us!). You can avail of a minimum of one board lot, or usually a maximum of 25K.

So, at the start, you need a broker or the person authorized to execute your trade (more on this later on how to choose one). So you need to enlist to one, and if you are confident of yourself and technical savvy, you opt for online trading. I have listed some online traders at our Philippine Stock Exchange (PSE) on the right. Either way, the minimum amount you need to ante to open an account is 25K. I don't know if you could find lower than that.

So, let's say you need a minimum of 25K to get the ball rolling  investing in the above instruments (UTIF, mutual funds and stocks).

But what's the maximum cut- off amount in order to be considered a small investor? Hard to say; and any limit is arbitrary.

You need some sort of diversification. It would be boring if you only bought one type of stock, and watching its price gyrates. You might also need to leave some amount of cash for opportunities that suddenly arises and park a portion of your hard-earned money to a "safer" mutual fund.  And since you have more than the minimum amount, you create a portfolio of 4 to 6 stocks that you are comfortable monitoring with.That would be around 100K.

For those who are luckier to have more play money, and for those who have been on the trade for sometime now, and who could actually draw regularly some additional income from his investments, the amount we are looking a t would be in the order of 1, or even 2 million pesos. Above that, most brokers would consider you a preferred client, and you would look down on the small investors stock program as a pittance. Then you are no longer considered a small investor.

Ok then. For our purposes let us limit the small investor as one who has between 25 K and 2 m to invest in the capital markets.

Does that include you?


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