Gone are the days where investors in Singapore had to trade shares in the standard board lot size of 1,000 units.
From 19 January 2015, the Singapore Exchange (SGX) reduced the standard board lot size of securities from 1,000 to 100 units.
With the change, higher-priced blue-chip shares like DBS Group Holdings Ltd (SGX: D05) have become more accessible to retail investors.
Prior to that, if you wanted to invest in DBS, you had to fork out a considerable sum of money.
Taking a random date of 2 January 2015, you would have spent at least S$20,500 since the bank traded at S$20.50 per share on that day.
I have also benefited from the board lot size reduction as I managed to buy shares in Oversea-Chinese Banking Corp Limited (SGX: O39) that I would not have been able to easily do so otherwise.
While that reduction has helped investors like myself, I think SGX should eventually reduce the lot size to just one share.
By reducing the board lot size to just one unit, investing can become more accessible to the general public, just like how it was when it was reduced from 1,000 shares to 100 shares.
In its 2015 annual report (for the year ended 30 June 2015), SGX said that in the six months following the board lot size reduction from 1,000 shares to 100 shares, the monthly average number of retail participants trading Straits Times Index (STI) stocks increased by 9% compared to the preceding six months.
As of the time of writing, there are six stocks out of the 30 STI components that are selling at above S$18 per share. This means that investors have to fork out at least S$1,800 to buy 100 shares, which could still be a lot of money.
While there are some Regular Shares Savings Plan (RSSP) where investors can get access to blue-chip stocks at a low quantum, there are certain disadvantages such as the need to pay monthly handling fees and other fees for dividends and corporate actions.
The shares will also be held under a custodian account and not under the investor’s CDP account. Therefore, the investor won’t have voting rights to the shares.
Another major benefit of bringing down the board lot sizing to one share is that investors can more easily build balanced portfolios.
For example, if I have S$2,000 and I wish to allocate it between two companies (50% each) currently, it will look like this now.
We can see that although I wanted to invest S$2,000, I only managed to invest S$1,750 and have S$250 left (12.5%) out of the original amount.
If SGX were to change the board lot size to one share, the same S$2,000 can be almost fully invested.
This is much better; I can get very close to the actual allocation that I want.
Better allocation is even more critical for institutional investors. The board lot reduction to one share will allow them to better manage their risk exposures (similar to the example above) than they would be able to right now.
Currently, the only option for investors who want to trade less than the board lot of 100 shares is the odd-lot market.
However, one major drawback is that it can be a very illiquid market, with a wide bid-ask spread at times. The commission to be paid can be high too.
By being able to trade with just one share, investors who opt for the dividend reinvestment plan (DRIP) or apply for scrip dividends would be able to sell off their shares easily.
For instance, with the recent round of scrip dividends for the local banks, investors who own 1,000 shares of OCBC, for example, would have received 21 new OCBC shares. With a board lot size reduction to one share, investors can sell off those shares without much difficulty.
A highly accessible market not only helps the exchange in terms of generating higher revenue, but it also gets it on par with other exchanges, such as in the US and the UK where trading lot is just one share.
An even lower minimum lot size could help to further improve liquidity and trading volumes for the overall Singapore market.
If SGX indeed brings down the board lot size to one unit eventually, brokers would have to reduce their charges accordingly as well.
It doesn’t make sense to pay the current minimum commission fee of S$25 for cash accounts if one were to invest just S$500 into stocks.
Personally, I prefer to keep my commission charges to below 1% of the capital injected.
But with the availability of pre-funded accounts (minimum commission of S$10 for some brokers), even if the commission for cash accounts are not reduced drastically, it might still make some financial sense to invest.
Having said that, lower brokerage fees across the board are always welcomed by retail investors!