Tax free accounts provide training wheels for beginners
13 August 2015
Posted by: Author: Robert Laing
Author: Robert Laing (BDlive)
Next year will mark the 20th anniversary of the JSE closing its Diagonal Street trading floor and switching to trading via computer screens and networks.
Unlike Chicago, Frankfurt and many other exchanges, which kept their trading floors going as a backup while they eased into the new technology, the JSE decided to make a clean break from the past — a reckless leap, I thought, given how firm Telkom’s monopoly was and how bad its lines were back in 1996 when it had only recently split from the post office.
The move from floor to screen trading caused a great deal of unhappiness among traders in the 1990s, partly because many could not handle the new technology, but mainly because the introduction of auction transparency and clear audit trails brought techniques of fleecing clients they had spent decades perfecting to an abrupt halt.
I was working in London in the early 1990s for a financial newsletter where one of my colleagues was a former trader who had been fired for mixing up the price and volume input boxes in his ex-employer’s new screen trading system — a typo that cost the unfortunate trading firm millions of pounds to rectify. My colleague was entirely unrepentant, seeing himself as the injured party and he was suing his erstwhile employer on the grounds that he had not received training explaining what labels like "Number of Shares" and "Price" meant. His lawsuit became pointless when his "finger trouble" ultimately caused his former employer to declare bankruptcy.
Mercifully, user interface design has come a long way since then. On modern online stockbroking systems, an alert box will typically pop up to warn you if the price you enter is too far from the last trading price. It will also warn you if your order is likely to execute immediately.
It is a great time to start becoming your own fund manager thanks to this year’s government initiative to encourage banks to offer Tax Free Savings Accounts (TFSAs) with strictly regulated fees. You must, however, do your homework before signing up with your bank’s stockbroking arm (a Google search should find it easily enough) to avoid their money market and Lisp (linked investment services provider) TFSAs.
The stockbroking TFSAs, in a sense, come with training wheels in that you can only buy exchange-traded funds (ETFs). One of the advantages of limiting the menu to ETFs is that it prevents novice investors from making the common mistake of buying penny stocks and thereby learning the hard way why liquidity is important.
Liquidity among the JSE’s small caps is so bad, there are at least three shares that have no trading history at all — Giyani, Sacoven and Southern View.
Others, like Resource Generation (ResGen), which eventually traded after languishing on the stock exchange for years, at time of writing has someone offering to buy 50,000 shares at 13c each and someone willing to sell 66 shares at 99c each, leading to what is known in industry jargon as a very wide "bid-buy spread" that is unlikely to narrow to where the share will trade in the near future.
Playing the JSE’s penny stocks is very much like playing the card game Old Maid. Once you have made the mistake of drawing them from another player (as in buying them) you are stuck with them unless you are willing to accept 13c each for shares you bought for 99c, using ResGen as an example.
The many "get rich quick by trading penny stocks" guides sound great until you get real world experience of why low liquidity is a problem. Yes, you can hypothetically double your money by buying a 1c share and selling it on to a sucker for 2c. One snag is those suckers generally only have a few hundred rand, so actual profits are low. An even bigger snag is companies whose shares are trading at 1c have a horrible habit of going into business rescue or liquidation, leaving you the ultimate sucker stuck with the Old Maid at game end when the share gets suspended and ultimately delisted.
With ETFs, there is always a buyer and seller at close to the "correct" price thanks to the fund manager acting as market maker. The fund manager is generally willing to buy the ETF at slightly less than the value of the underlying basket of shares plus accumulated dividends since its last payout, or sell it for slightly more.
You can try to do better than the fund manager is willing to sell for by putting in low-ball bids, and online trading systems generally let you keep your bid in the market for 20 trading days. I once managed to get Deutsche Bank’s Japan blue-chip tracker at a substantial discount by entering a bid at about 20% under the ruling price after the tsunami hit Japan in 2011 and a panic seller matched my offer.
But that deal turned out to be beginner’s luck, because I subsequently got hit with a nearly R150 broking fees to buy one R20 ETF when only one share out of the hundreds I was pitching for got matched. (To give Absa Stockbrokers their due, this was reversed before I even complained, but the small print in most online stockbroker rules say trading fees are calculated per day, so if your try my "low-ball" strategy over 20 days or trade in low-liquidity small caps and it takes several days to complete the order, you can end up paying more in broking fees than shares).
As I have mentioned in previous columns, the wonderful thing about the TFSAs is that there are no minimum fees. So they lend themselves to an auction strategy of pitching low to try and buy ETFs at a bargain within 20 trading days. This also means TFSAs will help you learn the ropes before you graduate to a "real" stockbroking account.
This article first appeared on bdlive.co.za.