Introduction to Collateralised Trading

Filed Under (Collateralised Trading, Trading Account, Trading Limit) by Webmaster on 26-08-2008

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This is Part 6 of my HOW TO START TRADING STOCK IN BURSA MALAYSIA series of articles.

If you missed my earlier posting, you can read them from the link below:

PART 1: OPENING OF CDS AND TRADING ACCOUNT
PART 2 : BUY, SELL AND CONTRA
PART 3 : BURSA MALAYSIA STOCK TRADING FEES AND CHARGES
PART 4 : MARKET AND OFF MARKET TRADES IN BURSA MALAYSIA
PART 5 : TRADING LIMIT AND TEMPORARY LIMIT FOR TRADING STOCKS

To recap my last posting, I introduced the Normal Trading Accounts and Credit or Trading Limit. In today’s posting I will introduce to you a different type of trading account; Collateralised Trading Accounts.

As the name suggests, you will have to deposit collateral for your trading.

DISADVANTAGES OF A COLLATERALISED TRADING ACCOUNTS

(1) You will have to place collateral such as Cash or Stocks into your trading account BEFORE you have any Trading Limit to Buy stocks.

(2) Your trading limit flactuates based on the value of your collaterals.

(3) Brokers has the right to utilise your cash deposit or sell your stocks to settle any unpaid contra losses. You might have different opinion on which stocks to be sold.

BENEFITS OF A COLLATERALISED TRADING ACCOUNTS

(1) You can have higher trading limit than if you opened a Normal trading account as your collaterals will be given a certain multiple to calculate your Trading Limit. Example; if you have RM100,000 cash and the Broker give you 2x multiple thus your trading limit will be RM200,000. If based on the normal criteria, you Normal trading account might be only RM100,000.

(2) You can still Buy stocks eventhough if your Dealer’s Representative (”DR”) doesn’t have any trading limit for the day. I mentioned in Part 5 that you might not be able to buy if your DR don’t have any trading limit.

(3) As you accumulated stocks that appreciated in their prices, you trading limit will eventually increased based on the multiple given by your Brokers. Thus you take advantage of your stocks in your CDS account rather than letting your stocks sit there idle.

(4) Some Brokers will give value to your unpaid Purchase stocks thus further increasing your trading limit.

CAVEATS:

(a) Some Brokers might give less than 1x of your stocks collateral market value. For example; you have 10,000 stock A with market price of RM1.00. Your Broker give 0.75x of your stock value. Thus your Trading Limit is RM7,500 (10,000 x RM1.00 x 0.75).

(b) Most Brokers will give higher multiple for Cash deposit, such as 1x to 3x.

(c) Almost all Brokers have price capping for their stocks. A PRICE CAP is the maximum value that the Broker will give value.

Example 1: Stock A has price cap of RM0.50. Stock A current market price is RM1.00. If you have 10,000 units of stock A, your collateral value will be RM5,000 (10,000 x RM0.50) eventhough based on the market price your stock value is RM10,000 (10,000 x RM1.00). Market price is the stock price currently traded in Bursa Malaysia.

Example 2: Stock B has price cap of RM1.00. Stock B current market price is RM0.80. If you have 10,000 units of stock B, your collateral value is RM8,000 (10,000 x RM0.80). Since the market price is below the capped price, the collateral value is based on the market price.

Some people has the misconception that if the price cap is lower than market price, the collateral value should be based on the price cap. Example; Stock C price cap is RM1.00 while the market price is RM0.90, therefore if you have 10,000 units of stock C therefore your collateral value is RM10,000 (10,000 x RM1.00) instead of RM9,000 (10,000 x RM0.90). Unfortunately its NOT TRUE!

The price cap is the MAXIMUM price acceptable to the Broker and not the MINIMUM price. So remember this as in future articles the issue of Price Cap will be raised again.

PRICE CAPPING

I will deviate a little to expand on Price Capping. This is important as it affects your trading limit not only for collateralised accounts but also for MARGIN ACCOUNTS. I will dedicate a few articles on Margin Accounts in my future posting. I believe many people will be interested to find out more about Margin Accounts.

There are two methods to cap the price of stocks; INDIVIDUAL STOCKS or GROUP OF STOCKS.

The examples above are price capping based on individual stocks. Brokers relied on the recommendation from their Research Department to recommend a price cap for individual stocks. The methodology of setting the price cap will depends on which approached used by their Research Department. They either used the Fundamentals of the company or based on Technical Analysis of the stock’s price movement.

The other methods for setting price cap is by groups. Some Brokers will give a value for all stocks in a certain Sector or in a certain Board. For example; Broker A might set the price cap at RM10.00 for all Main Board stocks and Broker B might set the price cap for IT Sector as RM5.00. There are also Brokers that used ratio (%) instead of value. For example; Broker C might give 100% market value to all KLCI stocks and only 50% to Mesdaq listed shares.

Brokers might used only value for individual stocks or value for group of stocks or ratio for groups of stocks or a combination of value and ratio. When a Broker used both the value and ratio, the collateral value will be based on the LOWER of both. Remember it is the LOWER VALUE.

Example: Stock D is a KLCI stock. Broker D capping is 100% of KLCI stocks but Broker has also capped stock D individually at RM5.00. If stock D market price is at RM8.00, the collateral value of 10,000 units of stock D is RM50,000 (10,000 x RM5.00) and NOT RM8,000 (10,000 x RM8.00). When compared between the individual price cap of stock D at RM5.00 versus 100% of the market value at RM8.00, the LOWER price of both is RM5.00.

I know its heavy reading today but I hope you get the idea. You can post your questions in Comments and I will try to answer them.

This is just an introduction to Collateralised Accounts. Next posting will cover the type of Collateralised Accounts. Yes! There are different types of Collateralised Accounts. Find out in my next posting.

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Trading Limit and Temporary Limit for Trading Stocks in BURSA MALAYSIA

Filed Under (Trading Account, Trading Limit) by Webmaster on 25-08-2008

Tagged Under : , , , ,

This is Part 5 of my HOW TO START TRADING STOCK IN BURSA MALAYSIA series of articles.

If you missed my earlier posting, you can read them from the link below:

PART 1: OPENING OF CDS AND TRADING ACCOUNT
PART 2 : BUY, SELL AND CONTRA
PART 3 : BURSA MALAYSIA STOCK TRADING FEES AND CHARGES
PART 4 : MARKET AND OFF MARKET TRADES IN BURSA MALAYSIA

In Malaysia there are various type of Trading Account that you can use to trade stocks listed in Bursa Malaysia. The most basic Trading Account is called ……the Normal Trading Account…..what do you expect!

In a Normal Trading Account the Brokers will usually assigned certain “Credit or Trading Limit” to you based on the information you have provided on your Account Opening Form such as occupation, annual income and networth. Each Broker has different set of criteria and policies on giving the Credit Limit. Yes, you are right in saying that it is very ‘Subjective’ and could be bias. If you know the owner or the director or the major shareholders of the Broking company, you might be given higher credit limit.

With a Normal trading account, you can only buy upto the credit limit given. For example; if your credit limit is RM100,000 then you can only at any one time have unpaid Buy contracts upto RM100,000.

There are however exception. Most Brokers allow client to request ‘Temporary’ additional credit limit. Therefore if your request for an additional Temporary limit of RM50,000 to your existing RM100,000, you will be able to Buy stocks with total value upto RM150,000.

Those who have experienced trading in Bursa Malaysia might have experienced a situation where your Dealer’s Representative (”DR”) informed you that he has no limit for the day. But what does it got to do with you? You have credit limit to buy but why does the Broker don’t allow me to buy?

As I have mentioned in my posting in Part 1 there are two types of DRs, Commissioned DRs and Salaried DRs. A Commissioned DRs will have to deposit with the Broker collaterals in the form of Cash, Stocks or Bank Guarantee. The DR’s collaterals can either be one or mixture of all three type of collaterals. For each type of collateral the Brokers will given a certain multiple as the DR ‘TOTAL TRADING LIMIT’. The multiples value varies and depends on the Brokers. For example; a DR A in Broker A has RM100,000 cash deposit and has been given a multiple of 10x. DR A will have Total Trading Limit of RM1,000,000 (RM100,000 x 10). Broker B might give a multiple of 11x and Broker C might give 9x. The multiple value can also changed with time as Brokers will given higher multiples after the DR has proven himself overtime with the same Broker.

Based on the above example DR A will ony be able to buy for all his clients upto RM1,000,000. Once all his active trading clients have a total unpaid contracts of RM1,000,000, DR A will not be able to buy anymore. If for example DR A has 100 clients and 20 of his clients have a total unpaid Buy contracts of RM1,000,000 and if you happened to be his client, eventhough you don’t have any unpaid Buy contract with the DR, the DR can’t buy for you until any of DR 20 clients paid or sold their unpaid Buy contracts.

TIPS : It is advisable to open a Normal trading account with more than one DR if you actively trade in stocks in Bursa Malaysia. Some Brokers don’t allow one client to open a separate trading account with another DR of the same company. So you will have to check with your Broker. When you have more than one trading account, you can switch to another DR if one of your DR doesn’t have trading limit for the day.

A DR can also be suspended from Buying for his clients if he has unpaid Contra Losses that exceed his collaterals. These Contra Losses are losses incurred by his clients. As such having more than one DR is a good idea. I mentioned above about Temporary Limit. As long as your DR has sufficient trading limit you can request for Temporary Limit.

The other type of DRs are Salaried DRs. Salaried DRs don’t placed any collaterals with Brokers. The question here is if Salaried DRs don’t placed any collaterals, then how is the Salaried DRs Total Trading Limit calculated?

Some Brokers give their Salaried DRs a fixed Trading limit while some Brokers don’t give their Salaried DRs any Trading Limit. Within the same Broker some Salaried DRs will be given trading limit while others will not have any trading limit. Normally Salaried DRs that handle Institutional Clients will be given trading limit while those handling individual clients will not be given trading limit. However there are exception as some individual clients could be HIGH NETWORTH CLIENT. These are probably Directors of public listed companies or clients who can show their high networth or high income.

You can get higher Credit or Trading Limit than a Normal Trading Account if you open a Collateralised Account.

In my next posting, I will explain what is a Collateralised Account and the different types of Collateralised Account.

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