The Essential Guide to
Online Trading
Sponsored by
The Essential Guide to
Online Trading Important information
Contents
The Essential Guide to Online Trading request only: 1300 763 437 General Editorial enquiries: store.help@thesmh.com.au The Essential Guide to Online Trading is published and distributed by The Age Company Limited, the publisher of The Age, and Fairfax Media Publications Pty Ltd, the publisher of The Sydney Morning Herald. It is intended to provide general information of an educational nature only. Any information contained in this guide does not have regard to the investment objectives, financial situation or individual needs of the reader. Neither The Age Company Limited, John Fairfax Publications Pty Ltd nor the sponsor, ETRADE Australia Securities Limited, intend by this guide to provide any financial product advice and information in the guide cannot be relied upon as such. All readers should consider obtaining independent advice before making any decisions concerning any investment product.
Chapter 1: Introduction
2
Chapter 2: A marriage made in heaven
4
Chapter 3: Know thyself
6
Chapter 4: Research
8
To have The Sydney Morning Herald home delivered, phone (02) 9282 3800
Chapter 5: Costs
10
All information correct at time of print (July 2008)
Chapter 6: Trade what?
12
Chapter 7: Smart trading
14
Chapter 8: Keeping score
16
Chapter 9: Support and service
18
Chapter 10: Now what?
19
The information in this guide has been prepared independently of ETRADE Australia Securities Ltd (trading as “E*TRADE Australia�) (ACN 078 174 973, AFSL No. 238277), a Participant of the ASX Group. E*TRADE Australia makes no warranty as to the accuracy or completeness of this information. Any opinions expressed in this guide are those of the author, not E*TRADE Australia, and E*TRADE Australia accepts no liability for any loss caused by use of the information. E*TRADE and the Asterisk Logo are registered trademarks of E*TRADE Financial Corporation or its subsidiaries and are used with permission.
Chapter 1: Introduction How times change. Barely a decade ago share ownership was the province of the wealthy, but today almost 50 per cent of Australians own shares – either directly or through their superannuation funds. Much of the interest in share ownership was kick-started by the privatisation and demutualisation of companies such as Telstra and AMP, where many Australians became owners of shares by default. With this increase in share ownership has come a rise in the desire to take more control of our investments: Australians are much more educated about assets such as shares and, as a result, want to be more involved in the decisions about what they should be investing in. This has in turn seen a boom in online trading sites where investors can conduct their own transactions. Since online trading was introduced into Australia in 1997, the number of Australians who choose to trade this way has soared. Simply sitting at your computer, you can analyse the market, call up research and conduct trades – whether at home, work or on the road. Traditionally, to trade shares you would have needed a full-service broker – someone to call for advice on your investments and to place the trades. However, there are several reasons to trade your shares online rather than placing your orders this way, not least cost, visibility and immediacy. The relatively low cost of online brokerage is a major factor in choosing to buy and sell shares yourself over the internet, particularly if your trade sizes are small, say, $1000 to $5000 each, as higher brokerage costs can have a significant impact on your net profit. Online, it is generally a third cheaper than a full-service brokerage fee. As well, these days,
most online brokers provide information and research for little or no cost (so you can arm yourself with knowledge to make more informed decisions). Another advantage of trading online is the visibility it offers. You can see what is happening in the market, what other traders are doing (the prices and volumes they are buying and selling). This can help you decide if and when to trade particular investments. Another key point is that you can see immediately what is happening with your order once you place it, rather than having to wait for a broker to contact you with an update. Online, you usually receive electronic confirmations as soon as your order is filled. Considering all these factors, and the increasing sophistication of the technology, little wonder online trading has become so popular. However, if you are new to this type of trading, you may want to start small while you learn how to get the best use out of this medium. Once you’re familiar with the systems, it is worthwhile learning about the different types of assets you can trade and the tools available to help you secure the financial future you are seeking. Who knows, you might even enjoy it!
Chapter 2: A marriage made in heaven The beauty of online trading is that anyone who has an internet connection can do it. You don’t have to be fabulously wealthy. Even if you want to do a one-off transaction – such as selling the shares that your parents left you to, say, put down a deposit on a house – you are able to do this easily and cheaply. All you need is to find your own online broker. This is the partner that you establish an account with in order to carry out your trades. Your choice of online broker will depend on your individual needs. While many offer similar services, there are a few variations that may clinch the deal for you. Choice of what you can trade is one of them. You may want a wide range of investment options to choose from. These may include warrants, options or managed funds so make sure your broker offers them. Perhaps the most important aspect is to choose a provider with a proven history of platform stability and speed. There is nothing more frustrating than not being able to place a trade because the system has crashed. During market downturns, when investors can get nervous, it is not uncommon to find many more orders passing through the system. Some brokers have already found themselves in trouble during busy times because they cannot deal with such large numbers of orders. Therefore, ensure you check out the history of brokers and how they have performed during such scenarios. Real-time pricing is another feature you should be seeking. You want to know that the price you see on screen for an investment is the current, or real-time, price. Who wants to sell their shares only to find out later that the price they saw on screen (and thought they were getting) was 20 minutes out of date?
Informed decisions come from ensuring you are well informed. This requires researching the investments you are interested in and keeping up to date with market developments. You will find most brokers these days offer basic access to information such as research on particular stocks and educational materials. Some also offer online tutorials if you are new to online trading and want to work through the procedure before committing real money. Some brokers also offer share recommendations, but you may have to pay for these. Establish what you need in the way of research and check which brokers offer it. Online brokers also offer a variety of trading tools such as stop-loss or market orders, conditional orders and alerts (see Chapter 7 for details). Such tools can assist you in maximising your share gains while minimising your losses – something we all want. While certain brokers may charge you to access them, others offer them as standard. Whether you need them or not depends on your individual needs. However, even if you think you won’t need such tools (because you’re just starting out), they may be of great assistance once you’ve gained more experience – it all depends on what sort of trader you plan to be (see Chapter 3 for more on this). Finally, finding a provider with at least one active trading platform means that if you do find yourself trading regularly in the future, you don’t have to transfer providers.
Chapter 3: Know thyself
If you are interested in trading online then it’s clear that you’re someone who likes to control their investment decisions. And the type of trader you are will play a large role in the online broker you choose to set up an account with. There are different costs and features depending on whether you expect to trade occasionally, more frequently or very often. Don’t just sign up to a premium package because it offers a wide range of trading tools that you only think you may need. You need to know which tools you are likely to employ – or you may find yourself paying for features that you never use. If you think you may only want to trade a couple of times a year, perhaps when you’ve saved up a lump sum, and you know what you want to buy, then cost is likely to be your main decider. In this case choose a package with an online broker that has few bells and whistles but a low brokerage fee. If you are not sure what stocks to buy, comprehensive research such as company profiles may be important to you. Some online brokers charge for this but may waive the fee if you do more than, say, six trades every three
months. Others offer multiple independent research providers for no additional cost. And if you intend to trade often, trading tools such as stop-loss orders and more detailed analyses, perhaps including share recommendations, may be of particular interest. While it is not always advisable to take the advice of friends when choosing investments, it is worthwhile listening to their recommendations if they are happy with their online broker. Find out how often they trade using their online service, what it costs, and if there are any issues that they have found that you may not have considered. When you are first starting out and online trading is new to you, it may be difficult to imagine that you could become someone that trades more than a couple of times a year. However, the ease of online trading has meant that becoming a frequent trader is not out of the question. Therefore, when seeking a broker, ask how easy it is to move to a different level of service – one that provides you with more information and trading tools – and find out what the associated costs will be.
Chapter 4: Research While online trading is now available at the touch of a button, it’s important to know what you want to trade. A successful trader is not a lucky trader. He or she is one that has researched the market thoroughly and whose trading is based on informed choices. Remember, it is your hard-earned money that you are using to buy and sell investments, and even though the actual act of online trading is relatively easy, this does not mean you need to spend less time researching your investments. And research – and the type of research – is what it all comes down to. As an online trader, you may not have access to detailed analyst research that a full-service broker provides, so you should be reading as much as you can about companies and markets from the financial daily newspapers and magazines. But a good online broker can also provide you with excellent research. An online broker has access to information and analyses provided by multiple, reputable sources – such as ratings agencies and large research houses – that have teams of analysts doing nothing else but poring over company reports to get a feel for how particular companies are going to perform, including any challenges coming up on the horizon. Most online brokers offer basic research. In some cases they also provide share recommendations and analyses to help you with your trading decisions. Look for tips where the experts explain their reasons why they are recommending particular stocks. Remember, in some cases you will have to pay for this type of access. If you are serious about trading, seek out a broker that can offer you sector-by-sector analysis where you can compare companies in various industry sectors. Some sectors
perform differently depending on what is occurring in the general economy, so being able to understand trends is important. Another reason for choosing an online broker that provides you with reliable and accurate information is that it is difficult to keep track of what is happening in the market and with individual stocks – particularly if you are in full-time employment. Who has the time to do this if it isn’t part of their usual job? And unless your job is to constantly monitor developments within companies and industries, it is very easy to miss out on a piece of news that can greatly impact on a company. Other types of information that can assist you in making a call on how a company is likely to perform in the future include a company’s historical data and outlook. This type of data should include financial ratios and dividend history. While it is relatively easy to find out information on the top 100 companies from sources such as daily newspapers, if you intend to become a more sophisticated trader it’s worth checking out the type of research provided by your online broker to see whether it can assist you in your quest.
Chapter 5: Costs
You get what you pay for and this expression certainly applies to the online trading sector. Not all services are equal and, as mentioned previously, you may not need all the services that you find yourself paying for. Establish the type of trader you expect to be, and the services you need, and then make a comparison between the online brokers that fulfil these requirements. The cost you pay per trade depends on a number of variables, including the number of trades you transact with your broker and the volumes that you transact. If you are an infrequent trader, the lowest-cost broker may be the best option for you, especially if you are only likely to be trading the top 100 Australian companies. Some of the cheapest trades can be made for less than $20 per trade, although bear in mind these are usually for ones that have limits of $5000 to $10,000. If you expect your trade to be around $10,000 to $30,000, expect to pay closer to $30 per trade. Brokerage on amounts above these are usually charged at a percentage of the trade – often 0.11 per cent and with no maximum limit. If you trade frequently, then choose a broker where the costs are reduced according to the number of trades. This number will vary between brokers, but ensure you check out all conditions associated with it. Another point to look out for is if the broker
10
charges you a monthly subscription fee or an access fee. If you don’t trade every month you may find yourself resenting having to pay this. And there may be times when your system crashes and you want to place an order over the phone – first check that your broker allows this, and know what the cost is. During times of extreme market volatility, the telephone may be the only way you can get hold of your broker, but phone orders do tend to cost more. Also, remember that cost isn’t everything. If you find that your broker provides you with excellent research, and you use this as the backbone of your trading decisions, you may feel it is worth paying more per trade in order to have this. Saving $10 a trade but making poor decisions because you are ill-informed is no saving at all. And while not a direct cost, some brokers demand that you keep a minimum amount of funds in your trading account. Make sure you find out if this is the case and what that minimum is. Another feature you may want to consider, which isn’t a direct cost but helps with keeping track of them, is whether you can integrate your trading account with your internet banking account. This way you can keep track of all your trades and have them consolidated at the end of the financial year, which saves you a lot of paperwork and frustration.
Chapter 6: Trade what? Contracts for Difference
Traditionally, shares were the most popular investments traded using an online broker. This is still the case, but an increasingly large range of products are being introduced to the market, and are becoming more popular as investors become more savvy. Apart from shares, some of the more popular products to trade in are managed funds, warrants, options and contracts for difference.
Managed Funds Managed funds – also known as unit trusts – are vehicles that allow you to pool your money with a number of other investors into a single fund that is then able to invest in assets that might otherwise be out of your reach, such as large infrastructure projects. Managed funds are what they say: funds managed for you by others – namely, investment professionals such as fund managers. Managed funds can invest in a variety of assets, including shares, property and fixed interest, or a combination of these.
Warrants Warrants are typically categorised as either “trading-style” warrants or “investment-style” warrants. Trading-style warrants are frequently traded, relatively short-dated and have high
12
risk/return compared to investment-style warrants. Investment-style warrants are less frequently traded, tend to be longer-dated and have a lower risk/return profile compared to trading-style warrants. Warrants are traded on the Australian Stock Exchange and provide investors with the opportunity to protect the value of their share portfolios, diversify into other sectors and asset classes and/or generate an income stream.
Contracts for Difference (CFDs) are an agreement between an investor and their CFD provider, to exchange the difference between the opening and closing price of a contract. CFDs are a derivative, enabling investors to gain exposure to price movements, without taking actual ownership of the underlying security. CFDs are a leveraged instrument, enabling investors to gain greater exposure to price movements for a fraction of the price of purchasing the underlying security. However, with increased leverage comes increased risk and it is possible for investors to lose more than their initial investment. A major benefit
of CFDs is that they allow investors to trade markets in both directions. For example, if an investor believes that an underlying security’s price will rise, they would open a “long” position. Alternatively if they believed the security’s price would fall they would open a “short” position. Not all online brokers will support the trade of each of these financial instruments. If you feel that branching out into warrants and CFDs is something that you may want to do, ensure that you choose a broker that gives you this choice. You also may want to talk over this decision with your financial planner, who can advise you where such a move may fit into your overall portfolio.
Options Options provide investors with the right, but not the obligation, to buy or sell a parcel of shares at a set price, on or before a predetermined date. Buying a “call” option, for example, provides an investor with the right, but not the obligation, to purchase a parcel of shares at a set price on or before a predetermined date. Conversely a “put” option provides an investor with the right, but not the obligation, to sell shares at a set price on or before a predetermined date. Options are listed and regulated by the Australian Stock Exchange. Investors can write options against shares that they own, or purchase options against shares that someone else owns.
13
Chapter 7: Smart trading If you plan to trade frequently, you will want a broker that offers a number of trading tools to assist you in your transactions, such as limit, stop-loss, conditional and market orders. Not all brokers provide all these types of tools, and in some cases those that do will charge you a fee, so make sure you know what you are getting and how much it will cost you. A limit order operates only within the limits of a specified upper or lower price. For example, you can request a limit order to buy shares in BHP at a price below $40. If the market price exceeds this limit, your order will not be filled, or may only be partially filled. However, the advantage of this is that you won’t be paying more for BHP than you wanted to pay, or could afford. Stop-loss orders are designed to ‘stop you making a loss’ – that is, they prevent you paying too much or receiving too little for a trade. Basically if you want to buy a share but don’t want to pay any more than say $20 for it, then when you execute your order you put this limit on it. The system then knows that you will pay any price up to $20 for it and won’t execute the trade if the price is over this. Similarly if you want to sell some shares but don’t want to receive anything less than, say, $10 per share, then this is the amount you specify when you set up your stop-loss order. If the share price never goes higher than $9.95, then your shares won’t be sold and your order will eventually expire, depending on the expiry limits that your broker has set in place. Stop-loss orders are very useful when you see the price of a share going down, as it can be difficult to think clearly in these times. Having a stop-loss strategy in place can help you limit your losses.
14
A conditional order is one that allows you to set a number of conditions before a buy or sell order is transacted. This is an excellent strategy to implement if you feel your own emotions may cloud your judgement. Conditions may include prices or the volumes traded. You can also request your online broker to send you an email or text message alert if a share you have nominated to buy or sell has reached certain conditions – such as a particular price. You can then make up your mind whether or not to transact depending on these conditions. Market orders are a buy or sell trade in which you are prepared to accept the price that the market is buying or selling at. You generally choose this if you are confident that the market price is the one you will receive when you transact and you are happy with that. While all these trading tools are extremely useful, if you are paying for them but not using them, then you should weigh up the cost of having this access.
15
Chapter 8: Keeping score
If you are trading online it is important to have in place a system that keeps track of your trades. A sound administrative and reporting system enables you to track the performance of your investments, as well as to keep accurate tax records. It is not much fun searching through your files at the end of the financial year trying to find all the details of your trades that you scribbled down at the time. Most brokers offer you the ability to view your portfolio online and monitor the buy and sell price of your trades. More sophisticated brokers allow you to dovetail their platform’s reporting information with the accounting software that you use. This saves you a large amount of time and fuss during tax time, as all your financial transactions are merged together including profit, loss and dividends. Your accountant will also appreciate it. By keeping track of your trades you can also work out what strategy has worked best for you. Over time you are likely to have
16
developed an understanding of the market that allows you to pick the most appropriate investments for your portfolio. However, what is also important is your trading style. There will be trades that have worked consistently well for you and others that haven’t. By having a comprehensive system in place you can analyse the successful and not-so-successful trades and work out this pattern. This will provide you with a greater understanding of yourself as an online trader and lead you onto the path of more success. So when choosing your online broker, make sure one of the questions you ask concerns their reporting system and whether it is possible to download the data on your trades into your own system. It may not sound like something you will give much thought to when you are just starting out, but as the number of trades you transact increases, you will certainly appreciate a solution that streamlines your reporting administrative tasks.
Chapter 9: Support and service When you first start out, online trading may seem like an intimidating prospect. You may be worried that you’re going to press the wrong button and end up having to pay thousands of dollars for shares that you didn’t want in the first place. Ensuring your online broker provides the help and support you need when you first venture into this world is critical. And don’t worry about sounding silly with your questions. Online brokers are keen to assist you with all your queries – and they have heard nearly everything – so don’t be afraid to ask. They want your experience to be as pleasurable and efficient as possible because they want to keep you as a customer, and have you grow with them. When you are doing your initial research into choosing a broker, get a feel for how willing they are to spend time talking to you about things like the trading process. Take a note of the language they use. Is it easily understood? Do they sound patient? If you feel you are being pushed at all for any reason, be very wary about choosing that particular broker. Remember, you are the customer and should be treated with respect. Some brokers provide online tutorials that take you through the entire trading process, so when you do come to do the real thing, it will look familiar to you. Choosing a broker that you can contact using different media is also important. When share markets are particularly volatile, it can be difficult to get online to trade shares – during these periods thousands of investors are trying to implement buy or sell orders. There’s no point having the ease of online trading if you cannot enact your trades. So when choosing a broker make sure there
18
are a number of ways you can contact them – not just over the internet. Your ability to contact them in different ways can to some extent depend on the level of service you’ve signed up for. While being able to contact your online broker using the telephone may be an option, check what the cost is. If you are new to investing or would like to occasionally receive advice that you can talk through with a broker, such hybrid services are also available from particular brokers. These services allow you to trade while still retaining the services of a full-service broker. Generally these sites are not competing with the more mass-market ones – and this is reflected in the fees they charge: around $39.95 per trade for trades up to $25,000 and 0.16 per cent on trades greater than that.
Chapter 10: Now what?
So you’ve made your decision and chosen the broker you want to set up an account with. What now? First, don’t forget to check that they are licensed by the Australian Securities and Investments Commission. This provides you with the security that they are regulated by a governing body. After that’s determined, then you need to contact them and get them to send you an application form or visit their website and register online. You will be required to fill in information such as your tax file number and bank account details. The trading account you nominate may be an existing bank account or one that your broker has specified you set up. You then need to ensure you have funds transferred to your trading account. Some brokers require you have a minimum amount in place before you can start trading. The Australian Stock Exchange runs a T+3 settlement system. This means all trades must be settled within three days of being enacted so your funds (if you’re buying) must be in place. When you set up your account you will be issued with a client number and password, which you can change after you first log on. When you wish to trade, you key in this information and you will be taken to the trading part of the site where you can start buying and selling shares.
The most basic information you will be asked for includes whether you are placing a buy or sell order and for which company. This may sound obvious but do check that you have ticked the right box here. If you want to sell 500 BHP shares, you don’t want to suddenly find out that you need money for the 500 shares you’ve just unintentionally bought. When you are sending a buy and sell order, make sure you are aware of whether you are sending a market order or a limit order (see Chapter 7). You also need to put in the quantity of shares that you want to buy or sell. This is another point you need to check carefully, as buying 5000 shares is going to cost you much more than 500 – and that pesky zero has been known to break a few wallets. Once you’ve put your order in, you will be asked to confirm the order and the details of your order will be clearly outlined for you. Again – read this carefully. While online trading is a simple process, never forget it is your money that you are using. Once your order goes through, that’s it. It cannot be cancelled. Brokers tend to use what is called straight-through processing, which takes your order straight through to the stock exchange.
19
Remember that it’s very important to avoid the greed and fear that can occur when trading, especially when trading is at the push of a button. It’s critical to avoid knee-jerk reactions and to think through all decisions, especially in the early stages of your online trading. Don’t invest just because you’ve opened a trading account and think you should. So if you are ever unsure about something, don’t just blindly press the confirm button. It is better to pull out of the trade than unintentionally lose your hard-earned savings. For all types of trades, though, you need to take responsibility for your decisions, no
matter how many you do each month. You should keep a written record of your trades that includes the reasons why you made a particular trade. This will help you work out over time whether you are reacting to market fluctuations or if you are basing decisions on solid research. And that’s it. While the first trade can appear to be a little intimidating, once you’ve
BECAUSE KNOWLEDGE IS POWER.
discovered how easy it is, you will build your skills very quickly. The ability to trade anywhere in the world puts the control of your financial future back in your hands. Here’s to a future of successful investing.
The markets may go up and down, but with E TRADE you’ll always be ready. As the only online broker with free access to a range of independent research providers, along with streaming audio and video news, you’ll get valuable insights so you can seize opportunities as they arise. And that’s a powerful thing. Here are just five of the experts whose wisdom you’ll benefit from. Aspect Huntley Utilise their stock finder tools, individual company profiles, financial indicators and get broker recommendations on the top 250 ASX listed companies. Boardroom Radio Get access to live and archived audio webcasts of ASX listed
company presentations and analyst briefings. Fat Prophets Key stock recommendations covering a range of global markets and sectors. Unbiased and independent research that’s easy to understand. Finance News Network Learn from Australia’s leading provider of online business and finance video news with regular bulletins, interviews, property analysis and investor education. wise-owl.com Benefit from the specialists in picking stocks that could outperform the market. With a wealth of information at your fingertips, you’ll be more informed and make better decisions.
JOIN E TRADE. VISIT WWW.ETRADE.COM.AU/STRATEGY
20
The E TRADE Australia service is provided by ETRADE Australia Securities Limited (trading as ‘E TRADE Australia’) (ACN 078 174 973; AFSL No. 238277), of Level 7, 10 Bridge Street, Sydney NSW 2000, a Participant of the ASX Ltd Group. You should consider your own investment objectives, financial situation and particular needs before acting upon any information provided. E TRADE Australia does not provide investment advice to online retail clients. The E TRADE and E TRADE Australia trademarks are owned by E TRADE Financial ETR253_EG_06/08 Corporation and licensed to E TRADE Australia.
BEEN THINKING ABOUT TRADING? GET STARTED WITH E TRADE.
You don’t have to be a financial wiz to invest in shares and trade online. With E TRADE, it’s surprisingly simple once you get going. For starters, you don’t have to watch the market constantly. Most newcomers purchase shares they expect to grow in the long term. And this means less time monitoring the market. To demystify online trading, we’ve created a website for new investors. It’s got all you need to help you take your first step into the world of share trading.
You can start now. E TRADE is free to join and offers a comprehensive range of industry leading tools and independent research providers that will help you understand and make the most of the market. To give you all the support you need, E TRADE has a dedicated customer service hotline for new investors. Call 1800 STOCKS (1800 786 257) from 8am to 8pm AEST, Monday to Friday. See how easy online trading can be with E TRADE.
FIND OUT MORE AT WWW.NEWINVESTORS.COM.AU The E TRADE Australia service is provided by ETRADE Australia Securities Limited (trading as ‘E TRADE Australia’) (ACN 078 174 973; AFSL No. 238277), of Level 7, 10 Bridge Street, Sydney NSW 2000, a Participant of the ASX Ltd Group. You should consider your own investment objectives, financial situation and particular needs before acting upon any information provided. E TRADE Australia does not provide investment advice to online retail clients. The E TRADE and E TRADE Australia trademarks are owned by E TRADE ETR253_EG_06/08 Financial Corporation and licensed to E TRADE Australia.