The Online Brokers That Will Rev Up Your Share Portfolio

Sun Herald

Sunday April 24, 2005

David Potts

It's never been easier, or cheaper, to buy and sell shares, as David Potts shows in a test drive of the system.

WHEN the bellhops start buying shares, it's supposed to be the time to be selling. Only these days the bellhops are trading online, and they're just as likely to be the ones who are selling.

With more than a dozen competing online brokers, some charging less than $20 on a small trade, it could hardly get any better for mum and dad investors. Except it has. These broking websites offer free features that even five years ago would have been the preserve of professional traders and their brokers.

All that's missing, at least from the basic offerings, are brokers' recommendations, but then the author of Teach Yourself About Shares and Online Investing On The Australian Sharemarket, Roger Kinsky, found even this can be a plus.

Well before the internet how on earth did they manage? Kinsky had just returned to Australia and had rung one of the leading establishment brokers of the time who recommended BHP. The shares promptly slumped after he bought them and he sold them in disgust.

Of course the broker was eventually proved right, only at the wrong time and, if online trading is so ridiculously easy, that also makes it a hazard. The only thing that could be worse than not picking the right stock would be selling it at the wrong time.

Still, there's something that's, well, true blue about trading online: you cut out the middleman, there are no unnecessary fees, it's something you can do if you get bored on a sickie, it saves getting down to the newsagent to buy a Lotto ticket and it's you against the rest of the world.

No wonder it accounts for half of all non-professional share trading.

Since it's Sunday, how about a test drive?

The right model

The best place to start is CommSec (www.comsec.com.au), by far the biggest online broker and owned by the Commonwealth Bank.

With half a million customers and more than half the online market, it has to be the benchmark.

"There's daylight between CommSec and E*Trade, and then moonlight to the rest," as E*Trade's Brett Spork puts it.

E*Trade sees itself as being for more sophisticated traders, a BMW to CommSec's Hyundai, and certainly its website is more complicated.

But honestly, for most investors there's little real difference between the models. Like buying a home, the choice can come down to, admit it, something as inconsequential as the colour of the screen (CommSec uses rather arresting shades of red and green to show what's hot and what's not) or E*Trade's handy list of a stock's latest 10 trades.

Strangely, neither tells you what the overall market is doing at the same time. This makes Westpac the only automatic among the basic models.

At the top end, E*Trade updates prices as they change, something you have to do by mouse clicking on most of the others. But you pay more for it.

All the major banks have an online arm, and their websites are as good as any. ANZ part-owns E*Trade, the Commonwealth has CommSec, the National has National Online and Westpac has Westpac Broking.

Have a look at a few websites. Registration is free and, frankly, less involved than getting membership at the local video shop.

Since it's free, you may as well have a second broker for a quick run around if the usual one has crashed, as websites do. And in heavy trading you may not be able to access your normal broker's website.

On the road cost

One GST promise that was kept was stamp duty on share trades. There isn't any.

You pay GST on brokerage, but because online rates are so low, that's only a few dollars. Yes, it's tax deductible after you've sold the shares.

So the only real cost, apart from the shares themselves, is brokerage. This is paid whether you're buying or selling. So a lucky broker who lines up the buyer and the seller gets two lots of commission.

Hmm, not even real-estate agents are that greedy, but then they get one commission out of a much bigger pie.

CommSec's brokerage starts from $19.95 for an online trade worth up to $10,000 whether you're buying or selling, but you need to have started a cash management account with $5000.

The funny thing is that once you've set this up, after your first trade you can run it down to nothing and you still get the preferential brokerage rate. Otherwise brokerage starts at $29.95.

The preferential rate climbs to $29.95 on trades between $10,000 and $20,000, then it's a flat rate of 0.12 per cent, while the mug punter rate is 0.31 per cent on anything above $10,000.

The cheapest online broker, a survey by InfoChoice shows, is Netwealth, which charges $17.99 for a trade up to $5000.

There's a small catch, or more inconvenience really. You have to show your money in advance BPay from your bank account will do before you can buy any stocks. Since they have to be paid for within three days, that's not a big sacrifice.

Funnily enough, online brokers don't see their discounted brokerage as their main attraction.

"Price is No. 4, after features, functions, website layout, speed and security," Spork says, though it sounds as though price is somewhere more like sixth preference.

Among day traders it's the convenience rather than the price that attracts them to online broking.

"For long-term investors, the difference in the service provided may be more critical than the difference in trading cost," Kinsky says.

By the way, both HSBC and St George's dragondirect are in fact the same broker, but the commission differs for each. Explain that one, I don't think.

Plan your trip

It's not well recognised that discounted online broking has taken a considerable amount of risk out of the sharemarket for mum and dad investors.

No, I didn't say all the risk, but certainly an encouraging amount of it.

It means you can buy, or sell, shares in small parcels without ringing up huge brokerage. So you can spread your purchases or sales and not be sideswiped by the whims of the market at a particular moment.

The pros call this cost-price averaging and, with compound interest, it's one of the great undervalued wonders of the world.

You just set aside a certain amount to spend every three or six months on a selected stock. The market will have been all over the place in that time, but your average cost won't have deviated too far from where it is at any given moment.

Better still, you would have bought more stock at the lower price, and less at the higher price.

Why be a mug punter when you can be the bookie?

The two biggest online brokers even offer conditional orders where you can set a stop-loss price or order a trade to occur under certain conditions. None offers short selling.

Some online brokers, including CommSec, will let you buy and sell foreign shares from their websites. The brokerage is higher, which seems fair enough.

Potholes

Because the brokerage is so cheap, not to mention tax deductible, and the websites a breeze, there's the temptation to trade more than you should.

Some sites discount the brokerage rate even more if you trade frequently, with E*Trade throwing in frequent-flyer points as well.

But frequent trading is closer to gambling than investing. It can also be self-defeating. Unless you've picked a real dud, the longer you hold a stock, the more likely it will be a good investment.

Even the experts say you can't pick to a year, let alone the minute, of a stock's bottom or peak.

And don't forget: holding stocks for less than a year incurs capital gains tax at your marginal rate.

At the same time, it's easy to become mesmerised by the trading screen by insisting on that last extra cent, which is self-defeating if the market moves right away from you in the meantime.

Just visiting

If shares aren't for you, and you've got some from demutualisations or whatever, online brokers can make it easy to sell them.

Andrew West, Easy Street and E*Trade offer what's known as visitor trading. This means you can sell your shares online as a one-off without being a customer of the broker. Brokerage for visitor selling is about $55 for a trade up to $10,000.

Finally, remember to trade safely. Sorry, couldn't resist that.

7 steps to trading online

1 Find a broker. You may as well start with the biggest, CommSec. Other popular online brokers are E*Trade, Westpac, NAB and HSBC. Since there's no charge unless you trade, you can join a few and see which website is easiest to use.

2 Register by downloading the application form from the website, or ask the broker to email or post it. You don't have to give your life story just your bank details. You'll probably have to send a photocopy of your driver's licence for ID.

3 Some brokers insist you start a cash management account with them. CommSec doesn't, although your brokerage is $10 cheaper if you do.

4 Send the form in and wait till you get an ID number. Normally this takes a few days. If you want to trade straightaway, courier the form back and ring the broker for your ID details.

5 Make sure you've set up a direct debit so your broker can move funds in and out of your bank account when you're buying or selling. Skip this step if it was part of the application form.

6 Pick your stock and price. You can place an "at market" order, but you run the risk of finishing up paying or getting something quite different to what you wanted.

7 Start with small trades so you get the hang of it. If you're buying, you must pay within three days.

CASE STUDY

WHEN he wrote to them for his research for the second edition of his book Online Investing On The Australian Sharemarket, Roger Kinsky had inadvertently set a test of what makes good online brokers.

"I was amazed how many didn't respond to my email," says Roger, a former mechanical engineer who now runs training courses in health and safety and is a tutor of share investing.

While Westpac and the NAB sent nothing back, a traditional full service broker, Goldman Sachs JB Were, sent "heaps of stuff" on its online service.

Having tried five of the biggest online brokers, he mostly uses CommSec which, incidentally along with E*trade, was the fastest to reply to him.

Online brokers have come a long way and Roger says there's little difference between them in the quality of their research, which seems to come from Aspect Huntley anyway.

He uses separate charting websites for his research, but then chartists get very finicky about their charts.

Roger has built up a share portfolio of about $500,000, mainly from blue chip investments.

"I only ever devote 5 per cent of my capital to speculative stocks," he says, the closest he gets to betting.

"I've had a few wins and losses. The speculative plays just break even, to be honest."

He says you should keep re-investing profits into the market, and if your stock has a dividend re-investment plan, join it.

"Stick to well-established companies that pay a fully franked dividend," he says.

And read his previous book Teach Yourself About Shares.

Oh, he did offer a couple of tips.

One is Austin Group, a ragtrader paying a 6.5 per cent fully franked dividend.

The other is Funtastic, which makes kids' stuff and has the ASX code FUN. It was marked down too far by the market when it made foreign exchange losses.

DAVID POTTS

© 2005 Sun Herald

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