This is a story of a trader who started his trading journey with zero experience and learning by mistakes.
Trading China S-chips
Dear diary, last entry I talked about the mistakes of trusting analysis reports written by banks and trading houses. It took me quite a long time to finally understand how the release of reports and newspaper articles can be deceptive to an inexperienced trader. This entry I’m going to talk about trading in S-chips, the once darling of the Singapore stock market exchange.
There was a period in time where the Singapore stock market was actively promoting investing in China S-chips. For those who were long enough in the stock market, you will be quite familiar with this. It was the time where China was gaining international market with their cheap labour and impressive earnings and GDP. Many China companies were looking to list in the Singapore market to gain more capital funding.
What are S-chips?
They are Chinese companies listed on the Singapore Stock Exchange and their shares are known as S shares. These Chinese companies exist in China and they chose to be listed in Singapore or dual listed in both Hong Kong stock market and Singapore stock market (Somehow I don’t know why the regulation allows them to be so easily listed in the Singapore exchange). There were so many of such companies listed in the exchange at that time. A lot of them has a China prefix infront such as Chinamilk, Chinafarm, ChinaAOil, etc (these are just examples and not specifically targeting them).
If you read their annual reports during their popular periods, their financials were quite impressive, with year after year (YoY) growth and positive outlook by their CEO. Many in their reports were reporting to be using the funds to increase in investment on subsidiaries which will contribute to growth. These financial reports were audited by the BIG 4 audit firms (Ernest & Young, KPMG, PwC, Deloitte) and some were praised for their transparency in their financials and even won awards.
The China S-chip scandal
2006-2007 was the height of China S-chips glory. Many banks and trading houses were publishing buy calls on S-chips citing great growth and good investment based on China’s economic growth.I too bought a few S-chips looking for some short term gains. Prices were every liquid for them and they can move up quite fast. Some I took it for investment. I sold and made some profits on some for short term gains but then these companies started to drop and kept dropping. Then they started to issue new shares or do stock splits further diluting my investments. Noticing something was wrong I got rid of the China S-chips for a
I too bought a few S-chips looking for some short term gains. Prices were every liquid for them and they can move up quite fast. Some I took it for investment. I sold and made some profits on some for short term gains but then these companies started to drop and kept dropping. Then they started to issue new shares or do stock splits further diluting my investments. Noticing something was wrong I got rid of the China S-chips for a loss, while keeping some that are already a great loss. (These investments are still just sitting in my portfolio in big red). Thankfully I don’t buy a lot of them.
I got out and stop trusting S-chips, they have become penny stocks and are too risky to trade in them. Now the newbies will start wondering what are penny stocks? Penny stocks are stocks which are valued at less than $1. Most of these S-chips are already penny stocks to begin with, that’s what makes it attractive for small time investors to buy them as they are cheap.
Then the S-chip scandals started. News of these companies started showing cracks in their financial reports and scandals of money embezzlement and fraud surfaced. Remember the company which won the most transparent award? I think they had reports of frauds in their accounting. Experts cited poor governance attributed to these scandals. Indeed, we Singaporeans were not familiar with how China companies operate and that’s what happened when you trust your money in.
You see, how can these companies get listed in the first place? Certainly it has to be a lax in the exchange company that screens the listing!
Takeaway lesson: Beware of something that people or trading houses are promoting too much about a stock. You’ll learn to trust your gut feeling that something is wrong with a company when you read into their financials.
Now during that period, the Singapore blue chips were quite stagnant and penny stocks were roaring active. There’s saying in the stock market world: When blue chips are stagnant and there’s growing interest in penny stocks, it’s a sign that the stock market is at the end of its peak.
I was still a stock market newbie and to keep up with what’s happening with the company you traded, there are forums which post people opinions about the stock market and company telling you what was the reason for the sudden price change in that stock you invested. One of the forums was Share Junction. It is a free forum and you can see topics on many companies and what people are saying. Of course, as I read more and more and learning from mistakes in believing what the “experts” are posting the topic. It’s not as useful as it seems. As in the forum, there are big traders who are manipulating readers to buy the stock in order to dump their holdings to them by putting company related news and saying it’s a good buy.
Takeaway lesson: The stock market is a ruthless environment for a trader. Under the profit holds many deceit and lies. Take every news with a pinch of salt and think logically.
Due to the loss of confidence in long-term investing, I started to go into short term trading. It generates profit faster! In the Singapore, you can buy and sell stocks without shelling any money upfront. It’s called Contra.
Lure of Contra
Previously, Contra allows you to buy and sell stocks in the Singapore stock market without using any money as long you sell it within 3 trading days (Now you need a certain percentage of cash to put as a collateral). It’s a double-edged sword method which is to encourage more liquidity for the Singapore markets.I started to use this method to churn some cash. In good markets, where the stock price moves up and you enter at a low price, you can sell it for a small profit after commissions. But the commissions is the killer as it eats up most of your profits. For example, you earn a $100 profit, but the commission is about $55, so you only earn $45 realised
I started to use this method to churn some cash. In good markets, where the stock price moves up and you enter at a low price, you can sell it for a small profit after commissions. But the commissions is the killer as it eats up most of your profits. For example, you earn a $100 profit, but the commission is about $55, so you only earn $45 realised profit. However, the loss is more because if you lose $100, you have to add commissions of $55. So in the end, you tend to lose more. if you keep losing.
Takeaway lesson: For new traders, do not be enticed by quick gains made from stories told by friends, relatives, and brokers. I have heard many stories people getting burnt playing contra because they risk too much.
Next, I will be talking about dangers of playing with Warrants.