Once you've looked at shares generally as an investment and thought about which shares in particular you might profitably invest in, it's time to start trading – and that's where stockbrokers come in.
A stockbroker is a person licensed to trade in shares. They also have direct access to the sharemarket and can act as your agent in share transactions, charging a fee for this service.
'Full-service' brokers offer additional services such as investment advice and stock research but tend to charge more.
'Discount' or no-frills brokers will execute your trades but may not provide the full range of other services – in particular, tailored advice – which helps keep their fees low. They operate via the telephone, internet or both. Examples of discount brokers include E*Trade and Commonwealth Securities (CommSec).
Brokers usually specify minimum amounts they'll handle – say, $1000. And shares are bought and sold in marketable parcels: you can place an order for 1000 shares, but you're unlikely to be able to trade 1050 shares.
Brokers will ask you to open a trading account, usually a cash management trust. When you buy shares, the cost of the shares plus fees and stamp duty will be deducted from this account automatically.
Which type of broker you choose will depend on a number of factors, such as your confidence in trading shares and your need for advice on stock selection.
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Trading on the ASX
There are three steps to trading on the ASX: placement of an order, execution of the trade and settlement.
To buy or sell shares on the ASX, you must place an order with a broker – typically via the phone or the internet.
When you place an order to buy or sell shares, you should specify whether the order is 'at market' – meaning you'll accept a price at or about the market price at the time – or 'at limit', specifying the highest price you'll pay or the lowest price at which you'll sell.
Make sure you confirm the details of your order when you place it. The broker should tell you the current market price (it pays to write that down) and should repeat back the details of your order: the amount of shares to be bought or sold, along with the price 'at limit' or 'at market'.
(Regardless of the type of order, a broker is obliged to try to achieve the best price for you in the prevailing market conditions.)
Brokers talk in numbers of shares not dollars. If you only want to spend $10,000, work out the approximate number of shares before you contact your broker. You don't want to find you've bought 10,000 BHP shares instead of $10,000 worth of BHP shares – there's a big difference.
If your broker has 'straight-through' processing, they should have your order on the market fairly promptly – bearing in mind market hours.
Orders are placed in a queue and traded depending on price and time – better-priced bids have priority; if there are several bids at the one price then the one placed first has priority.
Trading on the ASX occurs at set times and in phases:
- Pre-opening - 07:00 to 09:59
- Opening-Call Auction - 10:00 to 10:09
- Normal Trading - 10:10 to 15:59
- Closing Auction - 16:00 to 16:14
- After-Hours Adjust - 16:15 to 18:59
- Inquiry - 19:00 to 06:59
The pre-opening phase allows brokers to enter orders in preparation for the market opening. These orders are sequenced according to price-time priority and won't be executed until the market opens.
The opening-call auction takes place at 10am and lasts about 10 minutes. The opening time for each stock is determined by the first letter of their stock code (they open in alphabetically listed blocs). Buy and sell orders are matched and the Stock Exchange Automated Trading System (SEATS) determines the opening prices.
In normal trading, brokers enter orders into SEATS and SEATS matches the orders against each other, resulting in trades.
In the oddly named pre-opening prior to closing phase, brokers can enter, change and cancel orders in preparation for the market closing.
A closing auction phase occurs between 4pm and 4.15pm, and SEATS calculates closing prices.
During the after-hours adjust phase brokers can cancel any unwanted orders or amend existing orders. No new orders can be entered nor any executed in this time. Brokers wishing to trade can contact each other by telephone, however.
In the overnight inquiry phase, inquiries can be made in SEATS but orders can't be entered.
In Australia, share trades are conducted under a T+3 system. This means from the day you buy or sell your shares you have three business days to settle your trade by paying for the stock or transferring the shares you have sold.
The transfer of ownership is undertaken by the Clearing House Electronic Subregister System (CHESS) – an electronic shareholder register operated by the ASX Settlement and Transfer Corporation.
A typical settlement process begins with the notification of a transaction on SEATS to CHESS. An exchange of information takes place electronically between CHESS and the brokers of the buyer and seller.
A transfer of funds occurs through the ASX Settlement and Transfer Corporation (ASTC) and the CHESS register is amended to reflect the change in legal ownership of the shares.
Investors are mailed records of their shareholdings (known as CHESS statements).
Fees and Costs
There are certain costs involved in buying or selling shares, including:
- brokerage fees on each trade (brokers should provide a financial services guide setting out their services and standard brokerage rates and other fees).
- GST charged on brokerage fees (GST is not charged on share transactions themselves).
- capital gains tax.
A capital gain or capital loss is the difference between the proceeds when you sell an asset such as a share and its original purchase price.
Capital gains tax applies to assets bought since September 19, 1985 (when the tax was introduced). It's applied at your marginal tax rate – in other words, the top tax bracket into which you fall.
There are two ways you can minimise the amount of CGT you pay. First, hold an asset for more than 12 months and you'll pay CGT on only half the capital gain. Second, because the tax is applied to your net capital gains you can time asset sales so your capital losses partly or wholly offset your capital gains.
When choosing a broker, ask these questions:
- How much do you charge to buy and sell shares?
- Can I deal with you over the telephone and internet?
- Do you have frequent-trader discounts?
- Do you offer other services, such as company research and price alerts?
- How do you place buy and sell orders?
- Do you have access to floats?
- If you're a full-service broker, how often will you review my portfolio?