Tuesday, February 23, 2010
How the Web has transformed share investing
Australia is a nation of share investors, with nearly half of the adult population investing in the market. But many don't have much idea of what a stockbroker does.
Shares are bought and sold on the stock market, but can you imagine how chaotic it would be if all the buyers and seller had to individually negotiate with each other.
In practice, the market is kept orderly by having licensed members (properly, "participants") who collect the share trading orders from their many clients and place them in the market to be matched by other orders.
Only stockbrokers are licensed to buy and sell securities on the stock exchange.
For this service of handling the transaction on behalf of their client, the stockbroker charges a brokerage fee.
Stockbrokers vary considerably in their fees and the services they offer. But they fall into two main categories - Full-service brokers and Discount brokers.
Full-service brokers are your traditional style of stockbroker and are also referred to as Advisory brokers. As the name suggests full-service brokers offer the most support to their clients - they can advise you on investment decisions, provide research reports, grant access to new floats and even offer complete management of your portfolio. As you would expect, they also charge the highest fees.
Discount brokers ("Non-advisory" brokers) are a relatively recent development in stockbroking.
With the advent of readily available trading information on the Internet, it's more common for investors to want to make their own decisions. Such investors only need a stockbroker to place their orders for them, rather than offer information or advice.
Five years ago the Melbourne Age reported on how the Web was transforming share investing:
Web untangles the art of share investing
April 30, 2005
The internet has revolutionised investing. There's even more traffic to share sites than dating sites, writes Peter Weekes.
Investors are no longer waiting for their brokers to return from lunch to place a trade. The internet has transformed the way people invest, sweeping away the cloistered old-school-tie network of full-service broking houses.
Today, with more Australians per capita owning shares than any other nation, tens of thousands of investors are turning to personal investment and finance websites for detailed analysis of stocks and, increasingly, to buy and sell.
"A lot more small retail investors are doing it themselves," says John Curry, deputy chairman of the Australian Shareholders Association. "The research on these websites is free and trading is a lot cheaper."
The growing popularity of these sites can be traced to the fact that more Australians are share owners than ever before.
The 2004 Australian Stock Exchange Share Ownership Study found that 55 per cent of adult Australians, or 8 million people, hold shares in their investment portfolio, up from 51 per cent in the previous year.
"We believe that this is the highest reported level of retail share ownership in the world," the report said.
It also found that after only about six years since the first appearance of finance sites, online trades accounted for 30 per cent of all transactions and 52 per cent of all retail trades.
According to Hitwise, a company that tracks visits to websites, traffic to the stock and shares category of sites has soared by more than 64 per cent since January last year. They are now more popular than dating sites.
Last week, says Hitwise's marketing manager James Borg, Australians visited 425 different share websites, of which only 146 were Australian. Interestingly, visits were evenly spread across all age groups before dropping away once investors reach 55.
"This is in contrast to most other online categories," says Borg.
e*trade's head of marketing, Richard Burns, believes the advent and popularity of online finance sites has demystified share transactions.
"If you look at where the whole industry was even just a few years ago, there was a real element of mystery around broking," he says.
"Full-service brokers were charging really high fees and customers didn't really know what was going on. Once people started getting on these websites to research companies and actually complete a transaction, they understand it."
He says many large investors would benefit from the services that broking houses provide, but argues small investors do not receive value for money.
Hitwise supports this claim, arguing small investors need only quick grabs of information, rather than an arduous session in some Collins Street office. It found that last week, the average session time at a finance site was only nine minutes and eight seconds.
Intense competition among the hundreds of personal investment websites has ensured that features are similar.
They can basically be divided into two categories: those allowing buying and selling such as CommSec and HSBC, and those that provide a more educational focus with links to allow trading, such as ASX and TradingRoom.com.au, owned by Fairfax, which also owns The Age.
All offer company-specific analysis, analyst recommendations, up-to-date prices and the ability to track a portfolio and graph performance against the indices. They also provide price-to-earnings ratios, access to company announcements lodged with the ASX and news. Most even tell you how deep the market is for a particular stock.
As well as shares, the sites also provide information on warrants, options and managed funds.
Those sites that allow trading usually also offers email and SMS alerts of stock price movements.
CommSec is by far the most popular site, snaring a 21.8 per cent market share. It is also the site of choice of the ASA's Curry.
"They go through maybe six analysts, they tell you how many analysts they've got, how many analysts have got it as a buy, how many have got it as a hold. There's a lot of information there, all the ratios, price-earnings ratios, earnings per share, those statistics are all there for the individual companies," Mr Curry says.
He also looks at some of the broking houses' sites but says they are in a different category, catering for more experienced investors who perhaps trade larger parcels.
"They're not aimed so much at the retail investor. They're good and they're probably more aimed at the investor who's been around for a while and who is doing business at a higher level, whereas CommSec will sort of do anything for you - $1000 and you're trading."
Still, online brokers do offer other benefits. For example, investors must deposit money into a CommSec or e*Trade account before they start investing.
However, HSBC's site is linked to its banking, allowing investors to simply purchase the stock when they want without transferring funds.
HSBC also allow investors to trade on global stock exchanges.
- with Gabrielle Costa