How to Trade Shares or Stocks in Bursa Malaysia

This is Part 4 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 :HOW TO OPEN CDS AND TRADING ACCOUNT
Part 2 : BUY, SELL AND CONTRA
Part 3 : BURSA MALAYSIA STOCK TRADING FEES AND CHARGES

I mentioned Market Trade and Off Market Trade in Part 3. What are they?

No, they are not referring to your vegetable market!

Let us begin.

MARKET TRADE

Sometime Brokers or Dealer’s Representative (”DR”) refer to ‘Trade’ as ‘Deal’ such as ‘Market Deal’ or Off-Market Deal’.

When you give your order to Buy or Sell through Bursa order matching system (BFE), it is called Market Deal. This is because the matching of the order at particular price and quantity is not predetermined by Buyer or Seller. It is based on market demand and supply.

When there are more Buyer than Seller of a particular stock, the stock price will normally goes up. That means investors are more willing to Buy at higher price. Since investors wanted to confirm the Purchase of the stock, he will tell their DR to input his Buy order at a higher price than the rest of the of the investors’ prices as shown in the BFE. When more and more investors gave the same instructions for higher prices, naturally the stock price will goes up.

The reverse is also true. When more investors wanted to Sell a particular stock, the stock price will goes down. Investors desperate to dispose of their stock will instruct their DR to input a price lower then what other investors wanted to sell as shown in the BFE which again naturally drives down the stock’s price.

So again, Market Trade is consider as a NORMAL Trade and it is done through Bursa BFE’s auto matching system based on market demand and supply.

OFF MARKET TRADE

Off-Market Trade or Deal are the Buying or Selling of stocks based on a predetermined price by the Buyer and Seller. Generally the Buyer and Seller would have met and decided on a ‘Willing Buyer, Willing Seller’ concept to a particular price for a particular quantity of stocks. There are many reasons for such deals. Some of the common reasons are:

(a) Seller wanted to dispose of a big block of stock fast. If the Sales is done through the Normal Bursa matching system, the stock’s price can go down drastically (as I have mentioned above about more Seller than Buyer) thus not allowing the Seller to dispose of his big block of shares at the price the Seller wanted.

(b) Buyer wanted to buy a big block of shares at a price better than the current market price. If the Buyer go through the normal matching system, the stock price will be driven up to above the price that the Buyer wanted even before the Buyer can fulfill all the quantity that he wanted (again the concept more Buyer than Seller).

(c) Change of major ownership or shareholders. Sometimes a new owner wanted to directly buy from one of the major shareholders all the shares owned by the previous owner of the company. For example; a public listed Company A’s major shareholder owned 20% of the listed company and he received a very good offer from Mr Y. Mr Y wanted to own a public listed company and buying directly from the major shareholders will be fastest way for Mr Y to control a public listed company.

Off-Market Deal is also known as ‘Direct Business Trade’ (”DBT“).

In the stockbroking industry, there are 2 types of DBT known as ‘Married Deal’ and ‘Direct Deal’.

There is a difference between Married Deal and Direct Deal.

No, it has nothing to do with the marriage between a man and a women!

A Married Deal referred to the Purchase and Sales that is done between clients of the SAME Broker whereas Direct Deal is between clients of different Brokers.

TIPS : You will be surprise that many DR don’t know the difference between Married and Direct Deal.

There are certain rules for Off-Market deals.

You cannot do Off-Market Deal at any price you like. Before I proceed, I have to introduce to you a new term called ‘VWAP’ (Volume Weighted Average Price). The VWAP is automatically calculated by Bursa in the BFE and displayed in the DR computer screen (ie. BFE). Maybe there are some of you that are curious on how Bursa calculate the VWAP. For those that are not interested, you can skip this section below.

HOW TO CALCULATE VWAP?

Assuming there are only 3 matched transactions for the day (for easy calculation) for Stock A:
1. 20,000 units at RM2.00
2. 10,000 units at RM2.10
3. 20,000 units at RM1.95

The VWAP for ABC share is
= (20,000 x 2.00) + (10,000 x 2.10) + (20,000 x 1.95)
———————————————————-
20,000 + 10,000 + 20,000

= 100,000 / 50,000

= RM2.00

The process of doing Off-Market Deal are different from Market Deal. When you know the procedures, you will not feel frustrated with the delay or the documentations requested by your DR if you do any Off-Market Deal.

The Steps are:

(1) Buyer and Seller agreed on the price, the quantity and the date to transact the deal.
(2) Buyer and Seller contact their respective DRs. If its for Married Deal, then it only involved the same Broker which will make the whole process much simple and faster. Direct Deal will be more complicated as it involved 2 Brokers. For your information Married Deal can be transacted between clients of same DR or different DRs in the same Broker.
(3) The DR will submit an Off-Market Deal Request Form to the management normally Credit Control department for processing.
(4) All Off-Market Deal will need the Broker’s management approval which is normally by the Head of Dealing or Head of Operations in Investment Brokers or Executive Director of Dealing or Operations in other Brokers.
(5) Once approved the Off-Market Deal Request Form will be forwarded to a company paid DR to input into the Bursa’s BFE system. This step is only for reporting purpose to inform the public and Bursa that there are Off-Market Deals for the day for the particular stock. If its a Direct Deal then both Brokers will have to input into the BFE respectively to match the DBT.

Before a Broker will approve a particular Off-Market Deal, the deal has to meet a specific criteria which is a requirement under Bursa’s Rules:

(i) When an Off-Market Deal’s price is within +10% or -10% of the Previous day VWAP (”PVWAP”), the Broker can proceed to input into the BFE. Approval is without any problem. When a stock is listed for the first day, there is no PVWAP. Since there is no PVWAP, newly listed stock can’t have Off-Market Deal on the first day of listing.

Note: It is under proposal to allow Off-Market Deal for newly listed stock on the first day of listing but the guidelines hasn’t been finalised.

(ii) When the price is between +/- 10% to +/- 15% of the PVWAP, the Broker can still approve (normally they will), but the Broker will have to report such a deal in writing to Bursa after it has been done. The Broker will also have to provide a copy of contract note and a copy of payment/settlement of the contract to Bursa. Clients are normally not aware of such requirement.

In situation (i), no details of the clients is forwarded to Bursa when DR input the Off-Market Deal into BFE. But in situation (ii), Bursa will know who is the buyer and seller and how the payment for the purchase is made.

TIPS : Actually Bursa knows who Buy and who Sell because Bursa has access to the BFE system of the Brokers. Bursa can remotely access the BFE server to check the Buyer and Seller Trading Account Numbers and Names. This information is not known to many people.

(iii) If the Buyer and Seller want to Buy or Sell at the price that is above +/- 15% of the PVWAP, the Broker has to write to Bursa for approval before they are input into the BFE. It might take between 2 to 7 market days before getting a reply from Bursa whether the deal is approved. Broker has to provide more documents and the Buyer and Seller will have to sign certain forms. You will need to find out what are the required documents from the Brokers because sometime Bursa will request different documents based on the particular transaction.

Example of 10% and 15% of the PVWAP calculation:

If the PVWAP is RM2.00;

1) +10% = RM2.00 + (10% x 2.00) = RM2.20
-10% = 2.00 - (10% x 2.00) = RM1.80

2) +15% = 2.00 + (15% x 2.00) = 2.30
- 15% = 2.00 - (15% x 2.00) = 1.70

Part 3 and Part 4 of HOW TO START TRADING STOCK IN BURSA MALAYSIA are more than basic information so it tend to get more technical. Is your head getting dizzy?

I will end Part 4 on BURSA MALAYSIA MARKET AND OFF-MARKET TRADES.

Do you think you can still take in more information? Wait for my next posting. It will be next year.

HAPPY NEW YEAR 2008!

This is my Part 3 of HOW TO START TRADING series.

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

Part 1 : HOW TO OPEN CDS AND TRADING ACCOUNT

Part 2 : BUY, SELL AND CONTRA

In this part, I will outlined the Fees and charges allowed by Bursa and Securities Commission (”SC”).

There are 4 basic fees/charges. When you buy stock the fees are added (+) to your gross value and when you sell stock the fees are deducted (-) from your sales value.

1. STAMP DUTY

Every contract will be charged a stamp duty which Brokers collect on behalf of the Government. Brokers will collect the stamp duty for onward payment to the Stamp Office. The rate is RM1.00 for every RM1,000.00 gross value of the contract and roundup to the nearest dollar.

For example; if your contract gross value is RM1,001.00, the stamp duty is RM2.00. If the contract gross value is RM999.00 the stamp duty is RM1.00.

Note: Gross Value
Before I go to explain the next type of fees, let me explain what is the gross value of the contract. The gross value is the price multiply by the quantity of the shares. example: RM1.50 x 1,000 stocks = RM1,500.00 gross value.

However there is a maximum quantum for Stamp Duty that can be charged which is RM200.00 per contract. If you contract value is RM300,000.00 and based on the calculation of dividing it into RM1,000.00, the value is supposed to be RM300.00 (ie. RM300,000 / 1,000) but but the maximum amount added to your contract note is RM200.00.

Note: You might be wondering what if I buy or sell the same stock but for different prices in the same day. For example; if you have 5 BUY contracts of stock A and assuming each contract attracted the maximum stamp duty of RM200.00 then you will have to pay a total of RM1,000.00 as Stamp Duty (RM200 x5) ? Lucky for you, NO!

You can request to your Brokers to consolidate all the Buy contracts of the same stock in the same day to ONE single contract. Therefore you will have only ONE contract note and you will only need to pay the maximum total of RM200. Generally all Brokers would have auto consolidated your contracts for the day but …..just in case….do remind your Brokers to consolidate your contracts. Ironically there are people who wanted that all their same day trades (BUY AND SELL) to be in each separate contract. Some of the known excuses is that the client buy the share on behalf of family members or friends.

2. CLEARING FEE

The Clearing Fee is charged by BURSA as the clearing house of all trades done. It is 0.04% of the contract gross value and upto maximum RM500.00. The Clearing fees is not round up or round down. If you contract gross value is RM23,500.00, your clearing fee is RM9.40 (RM23,500 x 0.04%).

Note: With effect from 1st January 2008, the Clearing Fee will be REDUCED from 0.04% to 0.03% of the gross value of the contract BUT the maximum sum has INCREASED from RM500 to RM1,000.

3. BROKERAGE / COMMISSION

The brokerage is sometime referred to as commission and this is the fees collected by Brokers. The Brokers is required to share the brokerages with the commissioned based Dealer’s Representative (”DR”) that handled the specific trades. Some Brokers also share the brokerages with their Salaried DR. This sharing is standard which is 40% to commissioned DR and 60% to Broker as per Bursa Rules and as per Standard Remisier’s Agreement which all commissioned DR signed when they joined the Broker. While the sharing ratio for salaried DR is fully negotiable or as decided by the Brokers.

The maximum amount allowed to be charged for normal trades (also known as market deal) is 0.7% of the gross value and the minimum amount is 0.6% or RM12.00, whichever is higher. As for Off-Market Deal, the maximum rate is also 0.7% but the minimum rate is half (50%) of the minimum rate of Market Deal (50% x 0.6% = 0.15%) or RM12.00, whichever is higher. As for Loan Stock, the minimum rate is RM2.00 for Market and Off-Market Deal.

Due to the competitive nature of the business, all Brokers will charge client the minimum brokerage rate for Market Deal (0.6%) and 0.15% for Off-Market Deals.

HOWEVER, for gross contract amount that is above RM100,000.00, the minimum brokerage rate allowed for market deal can be lower than 0.6% which is upto the minimum of 0.15%. The rate is decided by market demands. In my next blog, I will explain what is Market and Off-Market Deals. So you can see why I mentioned in the above that you should remind your Brokers to consolidate your contracts for the same stock for the same day so that you can get the lowest or the best possible brokerage rate. By consolidating, you total gross value for the day could be above RM100,000 therefore your minimum brokerage has been reduced from 0.6% to 0.3%. That is a great saving!

Note: With effect from 1st January 2008, brokerage charges for Cash Upfront and Internet trades is FULLY NEGOTIABLE irrespective of the gross value of the contract. If you are net savvy, you can input your BUY and SELL order via the Brokers’ Internet Trading Portal thus requesting for lower brokerage amount. This is good news for investors!

HOWEVER the bad news is that for those who trade via their DR, the minimum brokerage charges which was RM12 for stocks other than Loan Stock has INCREASED to RM40.

What is Cash Upfront trades?

It means that if you have deposited X amount into the Brokers account BEFORE you Buy stock for value not more than X amount, then you are entitled to request or negotiate for lower brokerage charges but still within the minimum RM40.

For example; you have a credit in your Trading Account of RM100,000 BEFORE you Buy shares with a total Net Contract amount of RM90,000. In normal calculation your brokerage charges is RM540 (RM90,000 x 0.6%). But since you already have cash or a credit in your Trading Account, you can request for a lower brokerage charge of below RM540.

TIPS : According to the new brokerage charges announced by the Government in 2007 Budget Report for Cash Upfront trade, you can actually ask for a brokerage charge that is lower than the minimum brokerage of RM40! Don’t tell anyone you get your tips from me! After you have benefitted from this Tips, I would be very happy if you can make a donation to my kids Gift Funds in the above menu.

This is the end of Part 3 of HOW TO START TRADING STOCK IN BURSA MALAYSIA series entitled BURSA MALAYSIA STOCK TRADING FEES AND CHARGES.

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