Investing: shares, property

Press, 6 September 1989, Page 17

Investing: shares, property

Shery Nicholls

MONEY Management

As a small scale investor in shares, as much for interest as income, I am concerned about the following. Sometime ago I sold a few odd lots of shares and received substantially less than quoted prices. I have also frequently noted in the business pages that a parcel of say 138 shares is sold for 10 or more cents less than large parcels. On the other hand when one buys a small amount, or an odd lot, then one is charged quite high rates. Would you not consider this totally unjust, and should it not receive more publicity? Similarily, when very doubtful business practices take place there is often little comment by the media. Would you like to Small Scale Investor.”

A First I shall explain the reasons for the additional charges on small parcels, then answer the question on “doubtful business practice.” The Stock Exchange has listed marketable parcels. They are: For Shares valued between: Ic-lOc 10,000 is a min. parcel — with 1c odd lot margin; llc-20c 5000 is a min. parcel — with 2c odd lot margin; 21c-50c 2000 is a min. parcel — with 5c odd lod margin; 51c-$l 1000 is a

min. parcel — with 10c odd lot margin; sl-$2 500 is a min. parcel — with 12c odd lot margin; $2-$3 200 is a min. parcel — with 14c odd lot margin; $3-$4 200 is a min. parcel — with 17c odd lot margin; $4 and over 200 is a min. parcel — with 24c odd lot margin.

When you sell a small parcel it will be forwarded to the odd log broker who is handling that particular company. Each company has a particular broker appointed to handle small parcels. For example, all Brierleys may be handled by one, Fletchers by another and so on.

This means that for ease of administration and matching transactions one broker handles it all.

The cost is higher on these small parcels because of the difficulty involved in matching transactions. You mention a parcel of 138 shares — this has to be put together with another parcel (or several) to reach the listed, marketable size. Al- • ternatively, the broker would have to wait until he or she is approached by someone who wishes to buy 138 shares.

To calculate the cost, the broker will apply an odd lot margin relative to the shares trading price that day. For example,

the odd lot margin on a share trading at $1.50 would be 12c, which would return only $1.38 on the seller.

Your query about the listed price is actually quite a common one, whether the parcel is large or small. Many investors do not realise that in the case of a listed marketable parcel the vendor or purchaser can instruct his or her broker to accept or purchase only at a certain price — referred to as a “limit.”

If this is not done the parcel will be sold at market. You will be aware that prices fluctuate during the day, therefore one vendor or purchaser can have a different value of transaction from another.

I feel that if you are not able to trade in reasonable volume, the small investor should consider using a unit trust rather than trading individually. This means that your money is pooled with other investors which will give you a lower risk level and obviously considerable more purchasing power.

Now to your comment on the media and “very doubtful business practices.”

On a cynical note before October, 1987, very few of us were interested in how money was made. Our interest was simply that it was. Without knowing exactly which practices you are referring too I cannot comment.-! can, however, comment on the media’s attitude.

From my reading, the media have done an excellent job in following up stores on suspect business practices whenever they come to their attention. In fact, some of the media have been so enthusiastic in their pursuit of some stories they have been muzzled by the courts. I suggest you start reading the “National Business Review” for example. I would be happy to supply you with a reading list if you wish to follow this up.

Q I am considering using a mortgage-free house to back a loan to buy another. The house is worth approximately $70,000. Is it worth it with the interest I would have to pay at the moment? It seems a bit of a waste to just have a freehold house. Can it be put to work or not? Martin R.

A Your letter raises some very interesting points. New Zealanders are a nation of home owners. It is not quite the thing to rent — unless you are running a business. Most business owners rent premises for the simple reason that this frees up capital for other purposes. The major disadvantage of home ownership is, as you have realised, a freehold asset which is not being used to bring you in a return. You will, of course, eventually benefit from the increase in value of that asset. In addition, you have security. If you do use your home to purchase another — I assume for the purpose of renting — this

These certainly existed, and probably do still exist.

Sheryl Nicholls answers readers’ questions about money matters.

may have disadvantages. It could bring financial strain. The time you want to sell your property may not be the right time according to the market. Purchasing the right property in the right location takes quite a knack. On the positive side, borrowing should enable you to buy another property which will give you a capital gain. Buying a property at this time will enable you to take advantage of possible future growth, instead of going into the market when it has risen.

The subject of borrowing against your home to find another property or other investment is a large one. I can only scratch the surface here and give you some very general points for and against. The bottom line is that each proposition must be considered on its own merits. You must duscuss what you intend to do when you have located a property with your advisers. Look at the interest rate you are paying — can the income from the second property sustain the rate. Do you have the time and the inclination to be a landlord. Remember, if you claim taxation deductions you will need to hold the property for 10 years to avoid claw-back tax. As I have mentioned, high gearing may cause cashflow problems. Consider what type of loan you want to service, interest only, interest and capital or part capital, part interest with a balloon repayment at the end. Finally in times of low inflation, capital growth on property slows.

Questions for this column should be addressed to Sheryl Nicholls, Money Management, P.O. Box 5535, Dunedin, or telephone collect, Dunedin 773-232.