Published in The Australian, March 2006 by Ed Charles
Trading shares today is as easy as buying or downloading music from the iTunes music store.
And Australians are trading more shares that ever. In 2005, 25.03 million equity transactions were made on the ASX, an increase of 34.14 per cent on 2004.
Some people still prefer the security of dealing with a person on the end of a phone.
But more people that ever before are now using online broking. Our taste for sophisticated, high-risk, high-return services is growing.
This means that more than ever, people – experts as well as beginners – are vulnerable to making expensive financial mistakes.
However good an online broking service is, it is always open to human error.
The services offered by an online brokers are similar, with nuances in prices and costs of real-time data, and exotic bells and whistles such as international trading, warrants, options or the market’s latest darling, contracts for difference (see breakout).
The market leader is the Commonwealth Bank’s brand, Commsec, responsible for half of all online broking or 15 per cent of trades on the ASX.
It offers the lowest price: $19.95 for trades of up to $10,000 settled either through a Commsec margin loan or investment account.
The other key players are IWL, which owns Sanford Securities and provides the platforms for National and Westpac, Etrade (ANZ, Bendigo Bank and a dozen credit unions), and HSBC, which also provides the platform for St George.
The National and Westpac are catching up on Commsec in offering additional broking services.
In December, National, which has outsourced all its online broking to IWL, upgraded from two levels of service to three; casual, premium and professional.
In addition to shares and warrants, exchange-traded options, SMS alerts and conditional orders were introduced this year.
Westpac is keeping its easy-to-understand pricing ($24.95 or 0.1 per cent over $25,000), and this year will introduce options trading.
Together with Commsec Westpac is the only online broker to give credit during the standard three day settlement period.
Trader Dealer, an online newcomer last year, offers a flat fee of $33 up to $1 million, although there is also a software fee.
This system is better suited to more frequent dealers.
One of the difficulties in choosing an online broker is working out which offers the best value.
It takes time to find a schedule of fees on most websites and usually requires the downloading of a PDF.
The most sensible port of call is Infochoice.com.au, where all the prices and features of all the leading online brokers can be compared in one place.
One complication is choosing a casual, premium or professional service. Some charge extra for live data and sophisticated charting services.
Commsec chief Michael Blomfield says the average Commsec trade is for $8,000.
“Some of our biggest traders don’t use our professional trader product and them some of them do”.
“This product is for frequent traders who want to watch the market move all day.”
Some online brokers are easier to use than others.
All platforms have been built for Windows, using either Microsoft’s Internet Explorer or the Netscape browser.
This discriminates against nearly 17 per cent of internet users.
Macintosh users are severely disadvantaged, with Commsec or National the only real choices.
Professional investors do report problems with online broking, mostly caused by human error and clunky interfaces.
Roger Kinsky, author of Online Investing on the Australian Sharemarket ($29.95 Wright Books), says: “The greatest pitfall is making a mistake when you are typing in an order.”
“It happened to me once when I wanted to buy $3,000 worth of speculative shares.”
Using Commsec, he accidentally typed in 30,000 and despite all the safeguards the order went through.
Kinsky says: ”they do give you the option of cancelling your order before they send it through, so you check the details.
Nevertheless human error can still occur.”
He only noticed his error when the confirmation note arrived hours later.
Dale Gillham, a former home trader who runs the only Government-accredited trading training in Australia for Wealth Within, says such mistakes happen all the time.
Part of the problem is that some trading platforms default to buy – the obvious mistake being made when someone is attempting to sell.
He says people also will hit buy, and when nothing happens – due to congestion on the internet – hit it again.
They only realise their mistake when confirmation arrives for two trades.
Limit orders, used to buy a share at a certain price, are also a minefield.
Gillham says orders stay on the ASX for up to 90 days and people often forget them, and don’t keep records.
When a limit order is entered, the share price may drop, only to recover weeks or months later – triggering an unexpected execution (assuming funds are available).
Both Gillham and Kinsky say that one trap is being tempted to trade too often because it is so cheap.
Kinksy says that all research indicates the more times you trade, the less money you make.
Gillham says most day traders lose money, and men especially tend to overtrade.
The reality is that many people opt for an online broking deal that offers more features than they really need.
And this is why women are better investors; they have less ego, and are more conservative than men, and don’t trade as frequently.
Gillham says it is important to choose a platform that is easy to use, and prefers the offering from either Sanford or Etrade.
“They are all nice platforms and they are easy to use. Uncomplicated.”
“Out of all my clients, the most comments or complaints I get is for Commsec.”
Both Kinsky and Gillham recommend that beginners educate themselves before dealing for the first time.
The major banks offer reputable seminars that help with the basics. The ASX also offers courses.
Books are a good source of information.
Gillham, despite being an author, warns that people shouldn’t regard themselves as experts after reading half a dozen books.
Tips sheets are also popular and are offered free to frequent traders and those who pay for premium services.
These may include Alan Kohler’s Eureka Report or The Huntleys’ newsletters.
Many investors use software-based systems that draw on real-time ASX data.
Investors may also be tempted by high-pressure sales tactics marketers of “black box” trading systems.
The fact that the company requires all users to sign a statutory declaration stating that the results of trading remain confidential should arouse immediate suspicion.
Gillham says: “None of them work. They are all overpriced.”
Most professional traders use charting software packages.
The premium and professional level packages offer real-time market data and charting programs for a subscription and discounts are offered to frequent traders.
Of the commercially available packages, Gillham says: “If it costs more than $1,000 – for the software alone – you are being ripped off.
Every single professional I know who trades has software costing somewhere between $500 and $1,000.”
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