Buying and selling shares online
The relatively low cost of online brokerage is a major factor encouraging investors to buy and sell shares over the internet. If you're considering trading online or thinking about opening up an internet account with a broker, here are some tips to get you started.
Check if your broker is licensed
All online brokers operating in Australia must be licensed by ASIC. Check that the person or company you're dealing with is licensed.
If your online broker also provides you with financial advice, then you are entitled to additional protection under the law. These include:
- receiving a financial services guide (previously called an advisory services guide) from an adviser, this will tell you about the services offered, fees charged and how they deal with customer complaints;
- receiving a written statement of advice. This will record the advice you have been given and explain the basis for the advice; and
- having access to an independent complaints resolution scheme if something goes wrong.
For more information about how to choose a financial adviser read our booklet Getting advice.
Do your homework about investing
Approach trading online the same way that you would approach trading the more traditional way, that is, in an informed way.
The key is to do your homework before you trade. Know why you are buying or selling and what are the risks associated with your trading strategy.
While the internet provides you with unprecedented access to information about investing and markets, there is no substitute for informed consideration of your financial needs and goals. If necessary, obtain the services of a licensed financial adviser who can give advice about the investment strategy that best suits you.
Compare the online services available
Compare the costs and range of services offered by the different online brokers operating in the market. Find out about:
- brokerage and commissions for internet trading;
- the shares or other securities that can be traded through the online broker;
- any requirements about the sponsoring of shares by the broker;
- any money or other limits on trades that can be made online; and
- any costs to subscribe to information sources linked to the online broker's website.
Carefully read and understand the terms and conditions of any agreement about how you will trade online. Speak to a licensed financial adviser if you are concerned or unsure about what the agreement means for you.
Understand what happens to your online orders
When you buy or sell shares through an online broker you may be either:
- sending an electronic order directly to a representative of the broker, who will then place your order on the market; or
- accessing the markets directly - known as straight through processing.
The method of trading will depend on the particular services offered by your online broker.
Most online broking services require an employee of the broker to enter your online orders into ASX's trading system (SEATS). In this case, sending the order via the internet is in some ways similar to making an order by telephone or by facsimile - you do not have real-time access to the market.
Alternatively, some brokers can offer direct access to SEATS without the need for human intervention. If you are using the services of one of these brokers, it is even more important to make sure that the order details you type-in are totally correct.
Example
Allan was new to online broking. He thought that when he sent an online request to buy or sell shares, it would be executed instantaneously. His friend Andrew had told him that purchasing shares was as fast and easy as 'clicking the mouse'.
What Allan didn't realise was that orders placed over the internet do not necessarily go straight to the market. In most cases, orders are filled soon after they are received by the online broker- however, you should not automatically expect instant placement. |
Electronic communication is not foolproof. The delivery and receipt of electronic messages can be affected by factors such as computer software or hardware errors, and localised communication problems. Delays can occur, regardless of which type of broker you use. Keep this in mind when you manage your online trading.
Example
Allan had been watching the market and decided that it was the right time to buy 10,000 shares in Company XYZ at a price of $1.00. He believed that the price had 'bottomed'.
Unfortunately, between the time he sent the message and the time that the order was filled the shares had moved up to $1.10. The delay, in a fast-moving market, cost him $1000. |
Buying and selling shares through 'traditional' brokers may also be subject to unexpected delays which can cost you money. This might depend on the level of activity in the market at a given time and where you are placed in the queue of people buying and selling shares.
While the law does not state the time in which a customer's order should be executed by a broker, it does prohibit a business from making false or misleading statements about the type of the services it offers.
| TIP: Look out for any statements from an online broker that guarantee instantaneous execution of customer orders. This can't be guaranteed. |
Use limit trading where appropriate
When sending a buy or sell order to your online broker, you can choose between sending a market order or a limit order. The choice that you make may have important implications for your trading position.
A market order is an order to buy or sell shares at the prevailing market price. When you place a market order, you can't control the price at which the order will be filled. The timing of the execution of the order may make a big difference to your bottom line, particularly in a fast-moving market.
A limit order operates only within a specified upper or lower price limit. For example, you can request a limit order to buy shares in company XYZ at a price below $1.20. If the market price quickly exceeds this limit, your order might not be filled. However, you won't be paying more for shares in company XYZ that you wanted to pay, or could afford.
| TIP: Before you start trading online, make sure that you understand the use of limit and market orders, and that you know the terms on which your broker will accept these orders. |
Understand online confirmation procedures
Example
Louise owned 1,000 shares in Company XYZ and wanted to sell half her holding of 500 shares to put a deposit on a new car. Louise logged onto the internet and sent her online broker an electronic order. After a few minutes, she had still not received an electronic confirmation from the broker that her order had been received.
Because Louise wanted to make sure that she sold her shares while the price was high, she sent another order through. Louise later found out that both orders had been successfully received and placed by the online broker. It was too late to cancel the second order. |
Monitor the progress of your online orders. Make sure you get timely confirmation from the broker that your electronic order:
- has been received;
- has been placed on the market; and
- has been filled.
You can only change or cancel an order up until the time that it is filled.
Sometimes you might be unsure about whether your original order has been successfully received by the broker. In this situation be careful about resending the order. Contact the broker by telephone if you do not receive an electronic confirmation soon after the order was sent. Do this before you send another duplicate order. If you ignore these steps, you run the risk of inadvertently doubling-up on your original order.
Save the electronic records of your trading activity to the hard-drive on your computer for future reference.
| TIP: Before you start trading online, make sure that you are familiar with your broker's order confirmation procedures. |
Think about trading alternatives
Sometimes it might be difficult to access the broker's online service at the time you want to make a trade. You should consider alternative ways of communicating orders in case you can't access the broker's internet site. These might include placing orders by telephone or by facsimile. Because brokerage costs are likely to differ between the different means of communication, find out about the costs to avoid an unpleasant surprise.
| TIP: Before you start trading online, have in mind a contingency plan about what you will do if you cannot access the online service. . |
Privacy issues and online trading
Many brokers will have to comply with the National Privacy Principles (or NPPs) when collecting, using, disclosing and storing your personal information. The NPPs also allow you to request, access or correct your personal information held by a broker.
Before providing your personal information, you should check what it will be used for and who it may be disclosed to. This and other privacy matters may be dealt with in the broker's website privacy statement.
You should ask your broker what security procedures they have in place to protect not only the personal information that you provide on your online application form but also your instructions to the broker when you start trading over the internet. Remember that internet security cannot be guaranteed.
Finally, you should be aware that when you are using the internet, there are various ways that information about your internet usage can be collected without your knowledge or consent. This means that third parties may be able to track when and how often you use an internet broking service, or any other online service.
More information about the NPPs, how to make a privacy complaint and tips for protecting your privacy on the internet are available at the website of the Federal Privacy Commissioner at www.privacy.gov.au.
Check out the information available from ASIC
This website contains a lot of useful information to help you successfully navigate the information that is available about investing on the internet. You can also run a safety check on our databases to find out if your broker is licensed to deal in securities and/or to provide financial advice. Run a safety check now.
For help and general enquiries, you can contact our Infoline by email at infoline@asic.gov.au
Lots more information about investing on the internet
FIDO Website: Printed 07/29/2010
