Wednesday, March 10, 2010
Penny wise and pound foolish?
While online discount brokers have become increasingly popular in recent years, there can be some disadvantages.
For example, despite the automation provided by the Internet, the sheer volume of orders attracted by such brokers can introduce a delay in the time it takes for your order to be filled. This could be a particular problem for short-term traders such as day-traders who rely on quick execution of their orders. They can't afford to wait too long for orders to be filled while the stock price continues to move.
To be sure, minimizing brokerage is an important consideration for frequent traders - but having orders filled promptly may be the more important consideration. Saving tens of dollars per transaction is not much comfort if it costs you hundreds of dollars because of slow order execution.
This piece from the news.com.au site looks at the pros and cons of online trading:
Online share trading can be a tangled web
By Anthony Keane From: News Limited newspapers August 10, 2009 12:07AM
TECHNOLOGY has made it easier than ever to buy and sell slices of Australian companies, but with the convenience has come complications.
Witness the online share trading disasters that occurred in the past year when inexperienced investors bought shares in Queensland toll road firm BrisConnections for less than 1¢, without realising each share came with an attached liability of $1.
The result was housewives who dabbled in day trading facing legal threats if they did not cough up millions of dollars in instalment payments on their shares.
The debt recovery action is continuing. Fortunately for the many thousands of Australians who continue to buy and sell shares online, the BrisConnections debacle was an exception rather than the rule.
According to the nation’s biggest online stockbroker, CommSec, 15 per cent of all stock exchange trades are now transacted on the internet.
For less than $30, people can buy anything from stakes in blue chips such as BHP Billiton and Woolworths, to speculate on tiny mining stocks.
"The key attractions remain that it’s convenient, it empowers the investor, and it’s cheaper," CommSec managing director Matt Comyn says.
He says people are trading more on laptop and hand-held devices including the iPhone.
"Look for a broker who focuses on customer service, is financially secure and has an established reputation."
People should be wary of hidden administration charges and fees for minimum dealing levels," Comyn says.
Customer support is important. Most dealings may be conducted via the internet, but call centre contact may be required from time to time.
"Individual experience levels will also be a factor. Beginners should look for educational material and support tools."
Online broker Bell Direct says the percentage of share market investors using online trading has jumped about 30 per cent since 2007-08.
Bell Direct chief executive Arnie Selvarajah expects the growth to continue. "People are feeling a lot more knowledgeable because so much has been written about the market in the past 18 months, he says.
"Some people are saying ‘why pay $100 for a trade when I can pay $15?’
"The information we are getting from the marketplace is that most people are thinking it’s about time to invest in shares, after they have been sitting on the sideline."
Selvarajah says online trades can cost buyers as little as onetenth the price of using a fullservice stockbroker.
"My biggest tip is for people to just do it," he says. "Create an account and get some money in it – $1000 or $2000 is probably plenty.
If you one day see an opportunity, but don’t have an account set up, you can’t take advantage of it.
"You don’t have to trade on day one, but get it set up." Selvarajah suggest beginners look for companies they are familiar with – including retailers such as Woolworths and the banks.
"There is a plethora of information available in terms of research that you can get for free and will help you understand the sectors of the share market.
"Most platforms give you some basic research on companies."
Predictably, full-service stockbrokers are not big fans of online share trading.
Bell Potter Securities private client adviser Andrew Gartrell says typically, online stockbroking does not offer added value such as advice on what to buy and what to sell.
"You work hard to earn your money and you should be getting advice on where to invest it," Gartrell says.
"Do you have access to research which supports the reasons for buying or selling? Online brokers generally don’t provide much in that way.
"They provide the platform to execute your trades but don’t provide the recommendations or supply the research."