5 Helpful Information about online share trading

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Online share trading means using an online platform to buy and sell shares in companies and funds that are listed on a stock exchange. Online share trading platforms can give investors a relatively simple and inexpensive way to invest in the sharemarket.

In Australia, online share trading is an increasingly popular way for individuals to invest money, as you can generally start with a relatively small amount – generally $500 for an initial trade.

How does online share trading work?

Online share trading platforms offer accounts where investors can deposit cash and then use those funds to invest in shares. In return for a fee (known as brokerage), online share trading providers act as a go-between or ‘broker’, enabling the investor to buy and sell shares in companies and other investment options, such as exchange traded funds.

Your investments or ‘holdings’ are typically listed when you log into your account, and many platforms allow investors to monitor their portfolio’s performance over time and access market research to help you make investment decisions.

Most online share trading platforms in Australia offer access to the Australian share market, while some enable users to invest in certain international markets too.

Online share trading fees and costs

It’s a good idea to be aware of fees and charges that online share trading platforms might charge. Some of the more common fees include:

1. Brokerage fees

To start trading shares online, you can compare your options before selecting a share trading platform and opening an account. Through that account, you can use the cash you put in to start buying shares by placing orders on particular stocks or groups of stocks via a fund, such as an exchange traded fund (ETF). These shares will then appear in your online account so you can track their price and the performance of your overall portfolio. If you decide to sell your shares, you can place a sell order via your online share trading platform.

2. Ongoing fees

Some platforms charge users a regular fee for managing the trading account. For example, this could be a monthly or annual maintenance fee, or an optional subscription fee to provide you with regular market data. Not all platforms charge this.

3. Custody fee

Some trading platforms may charge a fee if a user does not make any trades in a set period of time (e.g. a year). This is also known as an inactivity fee.

4. Types of online share traders

The value for money an investor gets from an online share trading platform can depend on how often they buy and sell shares and how much they invest. Canstar’s Online Share Trading Star Ratings and Award Methodology classifies investors into three categories:

5. Casual Investors

A Casual Investor tends to buy and sell shares occasionally (on average, once a month) and often uses a long-term strategy to review their investment portfolio. When selecting an appropriate broker, comprehensiveness of investment tools is typically not of the greatest importance, with education, ease of use and cost generally being among the more important factors.

Active Investors

An Active Investor tends to buy and sell shares more frequently than the Casual Investor (on average, four times a month), and may wish to include managed funds in their portfolio. They typically use the latest market information and fundamental analysis data/reports to determine portfolio holdings. The comprehensiveness of research tools is often an important factor in selecting the best broker for them. Due to a higher trading frequency, cost tends to be an important factor.

Traders

A Trader tends to buy and sell shares very frequently (on average, 30 times a month) and they often use the latest market information to determine their portfolio holdings. When selecting an appropriate broker, the availability of derivatives can be an influencing factor. Due to a high trading frequency, the availability of a dynamic trading platform and cost are usually also key considerations for them.

What to look for in an online share trading platform

Canstar Research assesses and rates a wide range of platforms to determine which platforms offer 5-Star Value for casual investors, active investors, and traders. The two general areas Canstar bases its Ratings on are price and features.

Price

One of the most crucial factors in terms of value for money for online share trading is the price it costs to invest and trade. This includes the cost to place a trade (brokerage) and any ongoing costs for maintaining an account with that platform.

Features

The main features that Canstar assesses in determining its Star Ratings include:

The process for opening and closing the account

Facilities for depositing cash into the account to trade and settling trades (returning

Research options, such as charting and access to company and market information

Trading features, including market access and whether the platform offers margin loans to investors

CHESS sponsorship which is a facility that registers the shares you have bought in your name through the ASX so you have proof of ownership

Account management services, such as the different ways in which you can access the account, plus the security and reporting features

Customer service and education resources on offer

How do you trade shares online?

How can I make money from trading shares?

There are two ways investors typically aim to make money through shares: capital growth and dividends. Here’s an overview of each.

Increase in share price

The old adage of ‘buy low, sell high’ sums up one way investors aim to make money on the sharemarket. The idea is to buy shares in a company (or group of companies through a fund) that you believe will increase in value over time, then sell them for a profit once this occurs. In short, investors make money by buying at one price and selling in the future at a higher price. This increase in the value of an asset is also known as capital growth.

Of course, shares can fall in value too, resulting in a capital loss for investors who sell them for less than they paid initially. This is why it’s important to research your investments carefully and seek professional advice if you need it.

Dividends

If you own shares in a company, you may receive a regular payment from the company based on the profit the company has made. These payments are known as dividends. For some investors, this can provide a stream of income. Not all companies pay dividends, however. Some may instead reinvest any profits they make. Bear in mind, too, that companies don’t always make a profit, so when times are tough companies may pay smaller or fewer dividends.

Remember, you may need to pay tax on any income you receive through investing, either from dividends or capital gains. Speak to a financial advisor or tax accountant if you need assistance navigating these tax implications.

What are the risks of investing in shares?

Before investing in shares, it’s important to consider the risks and to seek professional advice if you need it. Some of the possible pitfalls to consider include:

Losing money

If you invest in shares, there is always a risk that you will lose some or all of the money you have invested. For example, if the company whose shares you have purchased goes out of business, you may not get any of your money back.

Volatility

Unlike keeping your money in a bank account, with shares, the value of your investment can go up and down regularly. If you need to sell your shares at a time when the market is down, this could mean losing money.

The ‘sleep at night factor’

With updates on current share prices often given on the evening news and through other channels such as social media, it can be hard to avoid exposure to the rollercoaster that is the sharemarket. This can be stressful for some people. The Australian Investors Association calls this ‘the sleep at night factor’.

Complexity

While the process of buying shares can be relatively straightforward, knowing how best to invest can require expertise and extensive research, particularly if you are investing in individual companies rather than through a fund.

Liquidity

If you have purchased shares, converting them back into cash can take several days, meaning you may not be able to access those funds at short notice in the case of an emergency. For this reason, investing in shares is generally viewed as a long-term way of building wealth, rather than a way of keeping your savings secure.

How to manage risk when investing in shares

Diversify your investments

Diversification can help investors to lower their portfolio’s risk and get more stable returns, according to Moneysmart. The idea is to spread your investments across multiple companies and even different asset types, such as cash, shares, bonds and property, to avoid the overall value of your investments dropping by a lot if a single company’s share price falls. You can also consider spreading your investments out over time so you reduce the risk of investing all your money the day before a market crash.

Research your options

Reading up on the companies and sectors you are interested in can help you ensure you are investing with your eyes open and not simply hoping for the best. It’s important to look to reputable sources of information, and to seek professional advice if you are unsure about how best to invest.

Do a dry run first

If you’re tempted to dip your toe in before investing for real, you might like to try an investing simulator. These allow you to try investing using virtual cash to see how the process works. The ASX’s Sharemarket Game is one example of an investing simulator you could try out.

Staying safe online when investing

As with all aspects of your finances, if you decide to use an online share trading platform it’s important to be vigilant for potential scams and to take steps to keep your personal information secure.

Through its Moneysmart website, the Australian Securities and Investments Commission (ASIC) says there are three main types of investment scam:

The investment offer is completely fake.

The investment exists, but the money you give the scammer doesn’t go towards that investment.

The scammer says they represent a well-known investment company – but they’re lying.

The regulator says scammers may promise high returns and no or limited risk to entice investors, and that to avoid falling victim to investment scams, you could consider taking precautionary steps such as:

Safeguarding yourself from identity theft

Getting independent financial advice before investing

Doing your own checks on investment opportunities, to verify they are genuine.

Ignoring messages and friend requests on social media from people or groups you don’t know.

Checking your privacy settings are up to date on your social media accounts.

Being suspicious of random or unexpected contact from individuals or companies, particularly if you have replied to something on a website or social media platform.

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