Sunday, May 22, 2011

The very first step to investment

Last week, I was teaching JC1 students on Arithmetic Progression (AP) and Geometric Progression (GP). Many questions on compound interest actually led to the sum of GP. This raises students questions on how much interest were we actually earning in our savings account.

I told the students that the money in our savings account are actually depreciating instead. How much of that savings is enough to pay for the future 'rainy' day? In fact, our money in the savings account are depreciating at a rate of more than 3% per annum, compounded for as long as you leave your money in that account. This is due to inflation calculated at 4% per annum.

However, to start investing, you will need a sum of money. It does not matter if you are still studying or starting in your first career or you have been working for quite some time. The habit of saving cannot be avoided. Instead of considering how you are going to spend your savings, why don't you think of how you can GROW that savings?

The habit of saving must be cultivated from young. It takes a long time for a teenager to save $5,000. But when you think of it as your first investment capital, which you can grow the $5,000 to $500,000 in the long run, it may well be worth the effort.

Why $5,000? There is no minimum sum to start investing but you have to pay a minimum commission of $25 for buying the shares of any company in the stock market. Here is an example.
If Jane buys 5,000 shares of Company X at $0.16 each, the purchase will cost her about $830, including the commission of $25. In fact, she is buying the shares at $0.166 per share.
If she buys 30,000 shares of the same company at $0.16 each, the purchase will cost her about $4,830, including commission. But she is actually buying the shares at $0.161 per share instead. That is a saving of $0.005 a share which is equivalent to 32 shares at $0.16.

The brokerage rate (commission) is 0.275% of your total purchase amount. The minimum commission of $25 is equivalent to buying shares totaling $9,000. By buying shares worth $9,000, you are actually maximising the commission paid to your broker. Any purchase above $9,000 will be calculated according to the rate of 0.275%.

Do your calculations and invest wisely.


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