Tuesday, February 7, 2012

Online Stock Trading is the New Farmville

This picture is how I have imagined trading stocks would be like in real life. Today, however, it is already possible to trade stocks online, minus the shouting and chaos of actual trading.

I have been really curious about how one could put some money in the Philippine Stock Exchange (PSE), not that I do have funds to invest, anyway. A week ago, I had a colleague of mine explain to me how he was trading online. Apparently, online trading services are now available in the Philippine Stock Market via sites like Citisec Online. This does away with getting a stock broker who will deal in your behelf. Citisec will be your virtual stockbroker.

I don’t not intend for this article to be a “how to” of sorts simply because I am well aware that I’m in no position to tutor anybody on this matter. I just want to share what I’ve learned so far.

From what I understand, one has to first sign up for an account on Citisec. After which, more importantly, “credits” must be loaded into the account by making an initial deposit or investment. This is done by making an over-the-counter payment or an online transaction with any of Citisec’s partner banks. Once the investment has been cleared and “credits” have been loaded to the account, you are ready to trade.

“Ay, parang Farmville lang?”

This was how I when I started to realize how online trading worked. It’s a lot like Farmville, even Café World, or games people usually play on social networking sites. You buy…wait…wait…wait…then harvest. In the case of online trading, however, of course, you don’t harvest. Rather, you sell. And the currency of course, is not in farm coins or XPs, but rather real money.

Buy and sell. Trading, as it seems to me, is a supply and demand kind of thing. On the one hand, one selects stocks he/she would want to buy and “bid” the price he/she is willing to pay. On the other hand, another chooses to sell from stocks his/her current portfolio and “ask” the price he/she is willing to sell. The dynamic, then, absolutely depends on that exact moment when the “bid” (demand) becomes in sync with the “ask” (supply). And when it does, the trade is made.

Virtual vs. Actual. I asked a stockbroker friend how different trading over Citisec would be against having a broker like her trade for me. The advantage of actual broker-assisted services is that you are provided stock analysis that will help you out in making trade decisions. You don’t have to pretend to know what price-earnings ratio is or how the market price of the stock has been doing historically. The broker will have the info ready for you. If you trade online, you are left with personal knowledge on the matter and, more often than not, you will be forced to just jump on any bandwagon. When they start buying, you will buy. And when they sell, you will, too, thinking that if everyone is doing it, then it might be good for you to do the same thing.

Fees and taxes. Though trading through a broker does seem like trading more wisely, it does have a downside: a higher commission rate. My friend told me that Citisec only charges the minimum when it comes to commission. One other difference, then, between online games and online trading is that while we, the players, get all the gross profit, say, when we harvest and sell our carrots on Farmville, we get a bit less when we do profit out of a trade online. This is because Citisec charges fees and, more importantly, the tax in advance from the sale.

Apart from commission, per se, VAT is also computed on top of it. VAT in trading, especially when you are “selling” is not actually VAT imposed upon you as a seller of trading securities, but, rather, VAT on the commission being charged to you by Citisec. The 25% commission is computed based on the Gross Selling Price of the stock. This, however, is still VAT-exclusive. That is why, on top of that, you have to compute an additional 12% over the original 25% to get the total amount Citisec will deduct from your sale proceeds for the commission. Effectively, it will be a 28% immediate deduction from your profits [25% + (12%)(25%)].

Then there is the stock transaction tax: a percentage tax imposed upon the sale of shares of stock traded through the Philippine Stock Exchange. It is ½ of 1% of the gross selling price of the stocks you have just sold or traded. It’s not computed on the gross profit (selling price less cost), rather the actual market price of the stock at which you sold it. This is appropriately deducted in advance by Citisec as the NIRC requires this tax to be withheld at source.

Breaking even. All the fees and charges, when put together, effectively consist of 30% of the gross selling price of the stock: 25% for commission, 3% for VAT (again, 12% of 25%), 0.5% for stock transaction tax, and an additional 1.5% for other fees. This will be charged on the gross selling price, not the gross profit.

For example, you bought 1,000 shares of stock at P5, for a total of P5,000. This is now the “cost” of your stocks. When the stocks go up, say, to P6/share, yes, you will earn a gross profit of P1,000 if you sell the whole lot, but you will still have to pay, additionally, the fees and charges. The 30% will not be charged on the P1,000, but rather the P6,000. In this scenario, if you sell, your gross profit will be further deducted by P1,800 worth of fees and charges (30% of P6,000) and you will end up losing P800. To break even, you must at least wait until such time the market price of the stocks you are holding is high enough to cover both your cost and additional fees.

Selling price – Cost of stocks – 30% of selling price = ZERO ßbreakeven point.

In this case, since you have to cover an additional 30% for fees and charges, you should only consider selling when the market price of your stocks reach P7.16, if you want to earn even just P10 worth of profit. Anything less than that, although a bit higher than your cost, will be selling in vain. Unless you’re a douche and you say you’re trading just for the heck of it and money is no object to you.

If the computations above did not make sense to you, I’d say don’t go signing up for an online account on Citisec. Because if you trade online, you will inevitably have to have some sort of grasp on that as you will be the one computing your profits on your own. Should you still be interested in stock trading despite your aversion to numbers, a personal broker will be better for you. Or, if you are like me and you are just someone who has no capital, is risk-averse, but has an insurmountable volume of curiosity, there’s always the trial version or the online trading game offered by PSE. Then, it’ll just be like Farmville. Only you’ll be playing with stocks, not harvests.

Ma. Eliza Christine Gomez, Entry #8

Previous posts: #1, #2, #3, #4, #5, #6, #7

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