Apart from getting a simple pay-check month to month, you can turn to investing to make their money grow at a faster pace. But before you set out to invest, you ought to know this important money concept which can literally change your life.
The 8th Wonder of the World – Compound Interest
Albert Einstein called compound interest “the greatest mathematical discovery of all time”. We think that it is a miracle because it can literally change your life once you understand the concept and how to apply it dutifully.
So what are we actually talking about? Simply put, compound interest lets you earn a higher rate of interest on your money over time and the results can be truly mind-boggling. Let’s take a look at this scenario which many would probably have heard of:
If you were given a choice to receive one million dollars in one month
or a penny doubled every day for 30 days which one would you choose?
Well, many people are also aware that this is a trick question and the correct answer points to the “doubling of a penny daily”. But do you know how big the difference really is at the end of the month? Here’s the calculation:
|Day 1: $.01
Day 2: $.02
Day 3: $.04
Day 4: $.08
Day 5: $.16
|Day 6: $.32
Day 7: $.64
Day 8: $1.28
Day 9: $2.56
Day 10: $5.12
|Day 11: $10.24
Day 12: $20.48
Day 13: $40.96
Day 14: $81.92
Day 15: $163.84
|Day 16: $327.68
Day 17: $655.36
Day 18: $1,310.72
Day 19: $2,621.44
Day 20: $5,242.88
|Day 21: $10,485.76
Day 22: $20,971.52
Day 23: $41,943.04
Day 24: $83,886.08
Day 25: $167,772.16
|Day 26: $335,544.32
Day 27: $671,088.64
Day 28: $1,342,177.28
Day 29: $2,684,354.56
Day 30: $5,368,709.12
Pretty Amazing, isn’t it? The difference comes up to a humongous $4.3 million, more than 4x of the instant gratification of $1 million!
Now a 100% return every day is impossible, but what’s more important is to understand the principle of compounding and how it holds true for even smaller returns. This is why compounding is a core aspect of good personal finance and the reason why the rich get richer.
For this reason, the earlier you start investing, the greater is the time period available to grow your portfolio as the power of compounding works in your favour. That said, it is never too late to get started. Even small amounts invested wisely can result in a sizeable fortune over a period of time.
Next up, we look at the things to look out for when you open a Stocks Trading Account…
Before you can buy shares and make some ka-ching, you will first need to open a Central Depository System (CDS) account in Malaysia or Central Depository (CDP) in Singapore provided that you are at least 18 years old. The CDS account is basically a place where all the shares you have bought in the local stock market are ‘kept’.
We are not so concerned about how you should learn to open a CDS account. You can do this easily by going to any stock brokerage firm or bank and they will also set up your trading account simultaneously. Once done, you can buy and sell shares either through online trading or by making phone calls to Remisers and/or Dealers.
5 Key considerations to note before selecting your Stocks Brokerage Firm
1) Stock brokerage fee
When an investor purchase or sell shares, a commission charge is payable during both the purchase and sale of shares. For new investors with limited funds, it is usually advisable to go for the brokers with lower minimum fees.
Because the industry is so competitive, most of the rates offered by brokerage companies are quite similar. Nonetheless, there are a few brokerages offering lower commission fees (RM 8 or RM 12) compared to the standard RM 28. Examples are: Hong Leong Bank, RHB, UOB Kay Hian and more.
2) Cash upfront or collateralised accounts
You have to choose between opening a Cash Upfront account, a Collateralised account, or both when it’s time to open a new share trading account. So what’s the difference between them?
For Cash Upfront account, your trading limit is capped at the amount you’ve deposited into your trust account but your brokerage fee is lower (i.e. if you have RM1000 in your trust account, you can trade RM1000 worth of shares).
For Collateralised account, your trading limit is usually multiple times of the amount you’ve deposited or pledged to your trust account but with higher brokerage fees.
Take for example Maybank2U:
- For the Cash account, your trading limit is 1x whatever your deposit and the min. brokerage fee is RM8.
- For the Collateralised account, your trading limit is 3x your cash/shares and the min. Brokerage fee is RM12.
3) Trading platform
In this era where online trading is much more prevalent than calling in to your remisier to place trades, it’s rather important that you are comfortable with the trading platform. You wouldn’t want any hiccups when it comes to overseeing your portfolio and executing your trading activities.
Preferably people would be looking at these few features -> user-friendly environment, fast execution and reliability. All told, it’s also helpful to browse through online forums and see what people are saying about the online trading platform of your broker of choice. Don’t forget about the mobile trading platform if you wish to save time and trade on the go!
4) Reliability and reputation of stock broker
Investing in stocks require you to place a huge amount of monies in a company for a long time. Hence, it’s crucial that you should always go out of your way to find out how reliable it is.
Bank brokering units (i.e. CIMB) are generally trustworthy as they are tied to the banks themselves, but that is not to say that securities companies, especially the big ones, aren’t dependable too. One good approach is to check with any of your friends who have been investing in the markets for some time. But if you don’t have that kind of network, remember the Internet is your friend.
Last but not least, similar to getting a new credit card or bank account, some brokerage firms will dangle some perks if you sign up with them. For example, Jupiter Securities offer promotion rates for new clients at 0.05% or min RM 8 for 2 months from the date of account opening.
Do your Homework
Setting up that stocks trading account is only the 1st step.
It’s critical that you do a lot of research or pore through a lot of books before really jumping into the investing world. Over my years of experience, I have seen people buy into stocks they totally don’t understand based on someone else’s “stock tips”.
To borrow a quote from Benjamin Franklin:
An investment in knowledge pays the best interest.
For new investors, one can either start small and get the ‘feel’ of the market OR create a stock virtual account where you trade stocks using virtual $$.
In addition, a mentor (I can be yours! Just email me at email@example.com) can also be very beneficial in your learning journey as you are able to cut short your learning curve significantly. Having been through the ups and downs of the markets, I wish that someone would have told me all these in the early days.
To help you get a head-start, I have documented 7 common mistakes stock investors make and hopefully, help you avoid the Pitfalls that have beset many people out there.