By Peter Freeman, Money Magazine, June 2007
In the past it may have been a bit cheaper at the height of the online broking battle a share trade could cost just $10 but today you are likely to get a lot more value for your money.
Much of this value comes from the long line-up of research and trading tools available from most brokers. These can help all investors, from the novice through to the most experienced, maximise their gains from the share market.
Denis Orrock, general manager of research group Infochoice, says the research brokers provide is likely to be extremely valuable for all but the simplest transactions. "If you just need to sell some shares you picked up by default, such as when AMP was listed, it won't be particularly relevant," he says.
"For most other share market decisions, access to decent research, whether or not from an online broker, is likely to be crucial."
The key, he adds, is to understand what sort of share market investor you are. This will help you know whether you will get value from a full-service stockbroking firm or can manage with the virtual service provided by online brokers.
Among investors who decide that the online route is best for them there will be those who, for one reason or another, don't need a broker's help and just want the cheapest deal.
Others will need more research, while a smaller group will want to use an online broker for more than just buying and selling shares in companies listed on the Australian Stock Exchange.
Some, for example, will want to trade derivatives, such as warrants and exchange-traded options, while others will be interested in investing directly in major offshore share markets. Some will want to do both. Stuart Cureton, the Australian-based general manager of online broker OptionsXpress, says a growing number of investors are interested in options trading, both on the local and US markets.
"We specialise in this area but also provide a basic online broking service for the novice," he says. Cureton notes that some inexperienced investors eventually move on to more sophisticated trading strategies, whereas others are happy to stick with just buying and selling a few parcels of shares each month.
"The investors who use online brokers are an extremely diverse group, but all are attracted to the convenience and control you get from trading online," he says.
Orrock stresses that it is not always a question of choosing between an online broker or a traditional stockbroking firm. It can make sense to have accounts with both.
"If you have a good relationship with a broking firm, then you probably get real help with some of the more challenging stock selection decisions, especially if you are investing in shares in smaller companies," he argues.
"Your relationship may also be good enough to get an allocation of shares in attractive new floats." This, he adds, can make the higher brokerage costs worthwhile.
But there is no need to pay high brokerage fees in many cases around $200 or more a trade if you are just buying or selling shares in mainstream industrial and resource companies. Paying an online broker $30 or $40 makes much more sense.
"Using an online broker for simple share transactions and a full-service broker for everything else will suit some investors very well," says Orrock.
Whatever use you make of online broking, the main challenge is choosing between the almost 20 services currently available. For some the problem will be solved by simply opting for the biggest. This title goes to Commonwealth Securities, the online broking subsidiary of the Commonwealth Bank.
Usually referred to as Commsec (www.comsec.com.au), this broking giant has around 50 percent of the online share trading market.
As the firm's general manager Matt Comyn acknowledges, part of this success reflects its early entry into the online business. He stresses, however, that getting a headstart is not much help if you don't get your product right. And there is little doubt that Commsec, backed by the resources and reputation of the Commonwealth Bank, has got it mostly right.
"We have invested a lot in the infrastructure that backs our online service," says Comyn. "This means it is very reliable and very easy to use, which we believe are crucial features for attracting and holding clients."
E*Trade (www.etrade.com.au) has also done a lot of things right and is in second spot with around 25 percent of the online market, with Westpac's online broking service (www.westpac.com.au) a distant third.
Brett Spork, head of E*Trade, acknowledges that his firm is a long way behind Commsec, but argues that it is growing quickly.
"At the moment we believe we are getting around half of all the new online business," he says, a development he attributes partly to the emphasis E*Trade puts on offering more sophisticated investment options, not just vanilla share trading.
According to Spork, the latest figures also suggest the trades made by E*Trade clients are, on average, larger than those of most of its rivals.
It is perhaps significant that all three of the biggest online stockbrokers are either fully owned or controlled by banks, with ANZ in the process of attempting to lift its 35 percent stake in E*Trade to full ownership.
NAB's online broking business, National Online Trading (www.nab.com.au), while trailing those of the other big banks, is also a genuine online force, while St George Bank's directshares is also growing.
Of course, biggest is not necessarily best. It is important to take account of a range of factors when choosing an online broker. The main ones are:
- The brokerage charged and how this varies with the size of the transaction.
- Quality of the website, particularly whether it is easy to use.
- The investments offered, including whether the online service provides discounted access to unlisted managed funds.
- Research and trading tools provided.
- Whether you are able to trade using a margin loan.
Next: Guide to fees and funds access >>
For the complete story see Money Magazine's June 2007 issue. Subscribe now.
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