Recently updated on: October 14, 2023
When starting yourstock market investingjourney, a common question is how much you should have before investing.
The common answer depends on the broker, but for the benefit of most beginners, it can be as low as P1,000.
The other answer is to start with P8,000. This amount is known as the 8K Rule in Investing in the Philippines Stock Exchange (PSE).
Now, let us learn about the 8K Rule and its advantages and disadvantages.
Table of Contents
What is the 8K Rule?
The 8K Rule is a common standard of practice for buying stocks in the Philippine Stock Exchange wherein you will only buy a stock once you have at least P8,000.
The idea behind the rule is that you are reducing the fees and commissions you incur by increasing the amount to P8,000 before purchasing a stock.
Similarly, brokers in PSE aim to earn money from their investors' transactions. We can see how we can use (or not use) the 8K Rule through some calculations. Let's begin!
What are the transaction fees in PSE?
Whenever you buy or sell stocks in the PSE, you pay certain fees, like taxes and broker commissions, added to the share prices per board lot.
Here are the fees you pay for each transaction:
- Broker Commission - 0.25% of the gross trade amount or P20 (whichever is higher)
- Value-added Tax (VAT) - 12% of the broker's commission
- PSE Transaction Fee - 0.005% of Gross Trade Amount
- SCCP Charges/ Clearing Fee - 0.01% of Gross Trade Amount
Additional fees you pay when selling:
- Sales Tax - No. of Shares x Price x 0.6%
A. Buying a stock
For instance, you are buying 1,000 shares of Company X at P10 per share. This will be the breakdown of your transaction:
- Gross Trade Amount: P10,000.00
- + Broker Commission: P25.00
- + Value-added Tax (VAT): P3.00
- + PSE Transaction Fee: P0.50
- + SCCP Charges/ Clearing Fee: P1.00
- TOTAL BUYING COST: P10,029.50
So the Total Cost after buying the P10,000 shares has now bloated to P10,029.50, which is P29.50 higher than your trade amount. The P29.50 represents 0.295% of your trade value.
B. Selling a stock
Then if you're selling your shares at the same cost of P10 per share, you will not receive your original investment of P10,000 due to the fees, including the sales tax.
Please note that you will only pay sales tax whenever you sell your shares.
For instance, you are selling your 1,000 shares again for the same price of P10. If you're a beginner, you might think you can still sell your shares at the same amount. Unfortunately, you must first pay the fees deducted from your total trade amount.
- Gross Trade Amount: P10,000.00
- - Broker Commission: P25.00
- - Value-added Tax (VAT): P3.00
- - PSE Transaction Fee: P0.50
- - SCCP Charges/ Clearing Fee: P1.00
- - Sales Tax: P60.00
- TOTAL SELLING PROCEEDS: P9,910.50
So the total proceeds that you'll receive after selling your shares will only be P9,910.50 after the transaction fees and taxes, amounting to a total of P89.50. The total deductions represent 0.895% of your entire transaction.
You will notice that selling costs more than buying since you now pay the sales tax, which is not part of the initial buying fees.
Making sense of the -1.19% loss after buying a stock using the 8K Rule
In the following examples later, you will notice a percentage loss of -1.19% after purchasing if you apply the 8K Rule. So how did that happen?
From the example earlier, upon buying 1,000 shares of Company X at P10.00 per share, you already paid P29.50 in fees and taxes. Then upon selling, you are also paying P89.50 in added transaction fees.
Adding the P29.50 (buying fees) and P89.50 (selling fees) will yield a sum of P119, 1.19% of the P10,000 gross amount.
Basically, once you buy a stock, you are already down by 1.19%, even if the price hasn't moved yet. This is one of the disadvantages when investing in the PSE, unlike in other stock exchanges where there are no commission fees.
However, if you're buying below P8,000, the percentage loss is much higher, as we will see later.
Broker Fee and the 8K Rule
The main premise of the 8K Rule is anchored on the 0.25% broker fee or P20, whichever is higher.
The idea is if you buy stocks worth P8,000, then you will pay the 0.25% broker fee instead of the P20 fixed price.
Look at this comparison:
- Buying P1,000 worth of shares.
- 0.25% * 1,000 = P2.50 (since P20 is higher, they will use it for the transaction, which is eight times larger than the 0.25% broker commission of P2.50.)
- Buying P8,000 worth of shares. (8K Rule)
- 0.25% * 1000 = P20 (this is equal to the other option for a broker fee of also P20.)
You will learn more about these later.
Applying the 8K Rule
It is easier to appreciate the 8K Rule through examples and illustrations of some hypothetical trades, so that's what we will do.
As you would remember, in my first post about the stock market, I didn't include the fees when buying and selling stocks to simplify the explanation of the topic.
However, we will look into them more in this post so you can have a more logical way of deciding whether to follow the 8K Rule.
For the following examples, we will again use the hypothetical company X to explain the PSE Transaction Fees currently trading at P10 per share.
We will also change the total number of shares when buying and selling the stock to illustrate the significance of the selection of P8,000.
We will see in this example how an increase or decrease in the number of shares relative to P8,000 will affect your buying and selling price.
Note: I used the buy-and-sell calculator fromInvestafor these examples.
Case 1: What if you bought with less than 8K Pesos of the company?
In this example, we can see that the investor bought 100 shares of the company at P10 per share, which is around P1,000 without the fees.
However, since the buyer didn't follow the 8K Rule and bought shares worth less than P8,000, he will pay a higher fee than the total amount he paid.
For this example, he paid a total of P1,022.55. The P1,000 is the gross trade cost of the 100 shares he bought plus the 22.55 total fees (refer to the PSE Transaction Fees).
You will also see below the green box that the price of the stock need to reach P10.53 before he can break even, which is around 5% of the P10 share price of the stock if you consider the buying and selling fees and taxes.
The Break-Even point is theamount where the total cost and gain are the same, resulting inno net profit or loss. In Filipino, we call it "tabla na."
At the bottom right of Image 1, you can also see the red box highlighting the total net loss of P51.10 (-5%), indicating that after buying the 100 shares, your portfolio is already down 5% even though the stock price hasn't moved yet.
Case 2: What if you bought P8,000 worth of stocks of the company?
The second example is if you followed the 8K rule and only bought a stock once you reached a buying power (BP) of P8,000.
With everything almost identical to the first example except for the total number of shares so you will reach P8,000; you will notice that the total fees of P23.60 are so close to P22.55 total fees for the first example, even though Image 2 is 8x higher than the cost of the first example.
It is also important to note that the break-even price has drastically reduced from P10.53 per share to only P10.13 per share.
After reaching P8,000, there would be no more added benefits regarding the broker commission fees since it will now only use the 0.25% fee when computing.
As you will see on the red and green boxes, the break-even point is also P10.13, similar to when you bought your shares using P8K. Then on the net profit, the percentage paper loss is also 1.19%.
This means that any increase will add a minimal advantage after reaching the threshold of P8,000 when buying stocks. However, you will pay higher fees if you don't use it.
Arguments for using the 8K Rule
1. You can reduce your transaction fees.
Transaction fees may look small at first, but if you are not careful, you may incur unnecessary expenses that you may have avoided if only you waited for a couple of months until you reached the P8,000 mark.
This is especially true if you are still just beginning your journey and need help deciding which stocks to buy.
So instead of heading straight to buying your first shares, you may use the waiting time to study the market.
2. It will require a smaller move to break even or profit.
As you can see from the examples above, the further you are to P8,000, the larger your fees will be, like the 5% if you're only buying with P1,000.
On the other hand, the closer you are to P8,000, the closer you are to reaching the maximum 1.19% fee.
So, if you are still a beginner, it will be much helpful in your trading psychology if you can see your stocks in the color green faster by following this recommendation.
Arguments against using the 8K Rule
1. You may miss out on big moves while waiting for your P8,000 to be filled.
During a bull run, every stock may look like it will go higher highs forever, and buying stocks is desirable.
So, if we're in a bull market, buying stocks on a strong uptrend may still produce positive results.
Unfortunately, we all know that this is less likely to happen, especially in the Philippine Stock Exchange (PSE), since it's been a while since we have had a strong bull run.
2. The P8,000 may be intimidating for new joiners in the PSE.
It is intimidating for new employees and stock market beginners to start risking their hard-earned money in the stock market. So, the P8,000 Rule may deter them from starting investing.
3. We are long-term investors.
Finally, for long-term investors, the idea is they can normalize their fees by usingpeso-cost averaging (PCA)by buying shares every month regardless of their cost.
Also, since they don't care about the near-term performance of their stocks, they can just let time do its thing in investing.
Verdict
The main reason for whether to use the 8K Rule in PSE is your capital and capacity to buy stocks.
It is understandable that when you are starting your investing journey, you may want to jump into the action immediately, but as shown by the numbers, it is advantageous to use the 8K Rule.
Though the P8,000 rule can be difficult for some, especially for beginners, I think a compromise may be in order.
For instance, you will still add P1,000 to your buying power.
However, instead of waiting for eight months before buying a stock, you will only wait for four months so that you will have P4,000.
This way, you are still building your discipline of delaying, taking advantage of minimizing the fees while learning more about the market.
Finally, if you still want to invest without accumulating the recommended P8,000 or even P4,000, then it would be wiser to invest inmutual funds.
Happy investing!
