Advice on buying shares by instalments: watch what you pay forservice charge - CHOICE # 372

Invest in the booming stock market as you save (for as low as $1,000 only) at regular monthly intervals.

Is that too good to be true?

The Consumer Council has conducted a survey on 12 banks offering similar innovative "Monthly Stocks Saving Plan" with minimum monthly contribution of $1,000 and in one case as little as $500. Banks generally provides for consumers' selection stocks, ranging from a minimum of 5 to a maximum of 88.

An important factor which consumers should take into account is the level of service charge - the standard rate of service charge in the majority of banks surveyed is 0.25% of the monthly contribution. Or a minimum of $50.

But for the small investors, the true rate of such service charge is substantially higher than the standard rate of 0.25%, due to the levy of a minimum charge of $50.

The fact is that unless your monthly contribution reaches $20,000 or above, the standard rate of 0.25% is not applicable.

For instance, in the case of a minimum monthly contribution of $1,000, the actual rate will run up to a high 5% (50 ÷ 1,000).

The rate reduces as your monthly contribution goes up - 2.50% for $2,000, 1.67% for $3,000, 1.25% for $4,000, 1% for $5,000. According to the Hong Kong Association of Banks (HKAB), the average monthly contribution for such plan is around $4,000, which means consumers are still paying a 1.25% rate for service charge.

So if your rate of investment return is not higher than the rate of service charge, you may stand to lose.

The survey reveals that the service charge is generally in "package" pricing, which has already included brokerage fee as well as other trade-related charges such as stamp duty, transaction levy and transaction charge. Only a few banks would collect trade-related charges separately.

Banks varied in their levy of other related charges. For example, 7 of the 12 banks charge for the collection of share dividends, ranging from a minimum of $15 to $30, while 5 exempt such charges.

Most banks do not levy charges in respect of change of stocks portfolio/monthly contribution, termination of plan, etc., which allows consumers to flexibly change their monthly contribution. However, consumers should pay attention to the handling time of carrying out such instruction as it varies among banks.

The decision whether or not to opt for "monthly stocks saving plans" or "ordinary stocks trading" is strictly one for the individuals. Consumers should study and compare the relevant fees and charges provided in the fees schedules of individual banks.

Generally, the former bears higher service charges but is an attractive option to small investors without a large lump sum for stocks purchase, but who can save and pay by monthly instalments instead. This also allows a more flexible use of capital.

Another advantage is the so-called "Dollar Cost Averaging", a concept which, under a "Monthly Stocks Saving Plan", allows you to buy more units at reduced cost when stock prices go down.

Conversely, when the stock prices go up, though fewer units will be bought, your total portfolio holding will benefit from the rising market.

Over time, "Dollar Cost Averaging" smooths out the peaks and troughs offsetting market volatility, so the risk arising from short-time market fluctuations will be reduced.

Nonetheless it cannot be taken to guarantee profit. You may suffer a loss if the price of the stock you selected is consistently on the wane.

Consumers should also pay heed to the sale arrangement of stocks in odd lot size as the monthly contribution may not be enough to buy a complete lot.

The survey found all 12 banks to accept the sale of odd lot but 7 of them would only offer "below-the-market" stock price to the investors. Further, some banks may not process the sale instruction for odd lot instantly but only on the following working day.