Not so many years ago, the only way for individuals to buy and sell shares on the Australian Stock Exchange (ASX) was by using the services of a stockbroker. The advent of the internet has changed all that. You can now buy and sell shares, and many other kinds of securities as well, from your own home or office, or even on a smartphone, using one of the many online brokers that have emerged in the last few years.
Over 40% of Australians now own shares in companies listed on the ASX, so stock market investing is now a mainstream activity. And while the choice of your online broker won't mean you suddenly start picking the right shares to buy and sell, different brokers — and different products from brokers — can make a big difference to your ultimate profit after costs. That's why RateCity has prepared this brief guide on the questions you should answer before choosing an online broker.
Things to consider when comparing online brokers
Online share trading accounts have very different offerings depending on how often you intend to trade — meaning buy and sell — shares. The easiest way to define your number of trades is to answer the question "how many trades do I expect to do every month?". At RateCity, we tend to group online broker offerings into 3 categories — one for "casual investors", who trade not much more than once per month; "active investors", who trade up to 8 times per month; and "traders", who as the name implies, trade often — perhaps as much as 40 times per month. Online broking products, with different fee structures and information tools, are designed with these kinds of categories in mind.
The most commonly traded security is shares on the Australian Stock Exchange (ASX). Shares represent part-ownership of companies that are listed on the ASX. However, there are many other kinds of securities that can also be traded using online trading accounts. For example, most accounts allow you to trade managed funds, which is a pool of money invested in various shares and other securities by a professional fund manager. The decision about what you'll be trading can influence how complex an online trading account you will need.
There are at least 2 kinds of fees that apply to most online trading accounts. First, there are standard brokerage fees. A brokerage fee is the amount that is charged for every trade — buying or selling — that you perform. These fees are expressed "per trade", and obviously if you're doing lots of trades, you'll be looking for the lowest brokerage fee possible. However, always keep in mind that brokerage fees aren't the only factor to consider when deciding on your online broker; a cheap platform without the necessary tools may not be of less value to you than a more expensive one with more research and tools. Second, there are ongoing or monthly fees. In many cases, these will be waived if you perform more than a certain number of trades every month.
Perhaps the most important thing that will drive your online trading is the information you get about what's happening in the market — the prices that other people are paying for stocks every trading day. There are several kinds of market data that are provided by most online trading platforms. Live pricing — this means you will see the prices that people are paying for shares every minute. This contrasts with delayed pricing, where the prices for particular securities are shown about 15-20 minutes after they actually occur. For some fast-moving stocks, this time difference can be a big deal. Market depth — a market depth report lists all buy and sell orders in the market for a particular security. It's important because traders generally want to know if there are multiple buyers for a stock — or in technical terms, whether there is "liquidity" to sell the stock. Market depth reports tell you how many orders exist, and the prices for each.
As well as knowing what's happening in the market at any given minute or any given day, there's a lot of information about how companies are performing, or how their industries are being affected by global or national factors. This information is generally compiled into "research reports" by brokers and analysts, and can help you make better decisions about what to buy and sell. Access to these reports — and the quality of the research — is a key selling point for online trading accounts. Some of the different kinds of reports you might get access to include:
Daily market reports — these reports, issued at the end of the trading day on the ASX, will tell you about overall performance (for example, the start and closing price for various stock market indices such as the ASX-200), and succinct commentary about individual companies and other important news that came out during the day.
Broker recommendations — these are research reports done by specialist staff within the online broker (or affiliated companies) that look at specific stocks and industries, and make recommendations about whether you should buy, sell or hold the stock, and at what price. These reports are normally not available to the general public, and are exclusive to the clients of particular brokers.
Company financial reports — while you can always trawl through the internet and the ASIC website to get company financial reports, it's time-consuming. Some online brokers provide a single point of access for all company financial information, saving you time when you want to check key financial information about a stock. Check out some of the best online trading products now