Smart Investor: Getting Started – Buying Shares

Smart Investor: Getting Started, February 2011

For non-investors, the market can be an intimidating place. There is so much written and said about which stocks to buy, when to sell, and the strength of dividends. But how do you even get started?

If you want to buy a share, you must first open an account with a broker. In the era of electronic trading, this is easier than it has ever been. We’ll take CommSec as an example, but in fact the process is just as straightforward at E*Trade, directshares, CMC or any of the dozens of providers now available in Australia.

Click “join now” on the CommSec web page and you are presented with a few fields to fill in, and asked to choose a password. Then a client ID is emailed to you. You choose between the various services on offer – the default is just share trading, but as with many providers you get better rates if you do more with them (so in CommSec’s case if you open a cash management account you get the best brokerage rate of $19.95. You can also sign up for margin lending on this page).

Next you provide some more information about yourself, and set the parameters as to who can access your account; and after that, you’ll be asked about being CHESS sponsored by your broker.

What does this mean? Well, CHESS stands for Clearing House Electronic Subregister System, and it’s the way in which the ASX keeps track of who owns what share in an electronic world. For your shares to be registered in the CHESS settlement facility, you need to be sponsored by what’s called a settlement participant of the ASX group – generally, your broker. You can also opt to be issuer-sponsored, which means the shares are registered by the companies that issued them, but in practice most people opt to be CHESS sponsored by the broker through whom they buy and sell all their shares.

This makes sense for a few reasons: it’s much easier for your broker to keep track of your overall shareholding positions, which you can then usually access through their web site; if you update your name and address, you only need to do it once, not for every individual company; and you can buy and sell shares immediately without having to dig around for individual shareholder reference numbers, which is what you need if you are issuer sponsored. If you already hold issuer-sponsored shares, or others with another broker, it’s simple enough to transfer them to your new broker. Once you’re in CHESS, every time you buy and sell a share, you get a statement detailing what’s happened the following month.

Having decided about CHESS sponsorship, you typically need an email address, your bank account details, your tax file number and some suitable form of ID. You have to sign your application form and send that back to the broker – pretty much the only part of the whole process that can’t be done electronically – and once all that’s processed, with the customer ID that was mailed to you, you’re ready to go.

What we’ve outlined is the quick’n’easy electronic route, which lets you buy and sell shares but doesn’t generally involve any individual advice. If you want a broker you can speak to, someone who will talk you through their suggestions, that’s known as an advisory brokerage service; contact them directly to find out what their services, processes and rates are. Typically their brokerage fees are higher, but of course you’re getting advice.

Brokers vary on the money side of things – some will require you to put a certain amount of money into an account before allowing trading, where others, especially those linked to banks where you already have an account, will be comfortable enough with their ability to debit from that account and instead will just set you a trading limit.

So, what next? We won’t, in this article, get into the process of choosing which shares to buy, except to say that many electronic brokers have a wealth of free information on their web sites to assist with stock research.

Instead, let’s focus on the practicalities of buying a share. Electronic brokers will have a tab for buying and selling – on CommSec it’s called “orders” – so click through to buying Australian shares. Here, you need to input the ASX code of the stock you want to buy (if you don’t know it, you can usually look it up on your broker’s site, or failing that, on the ASX site). Key in the number of shares you want to buy, and whatever contact or ID information the site needs.

You will typically also need to make two decisions. You can usually state the specific price you want to buy at, or opt for ‘at market’, which means your broker will buy the shares you want at whatever the price is at that time (or when the market opens, if you’re making your order outside trading hours). Also, you may be asked for ‘order style’. Different brokers offer different styles, but these might include an order that expires if it’s not filled at the end of the day; or one that might stay open for a month.

Some brokers will also allow you to use something called a stop-loss, which specifies that the broker should sell your position if it falls by a certain amount. This provides security that there’s a floor to what you can lose, but the order costs more than a typical order.

On that point, make sure you know how much you are going to be charged per trade: brokers often charge a flat fee to a certain level (typically between $15 and $35 per trade), but that may turn into a percentage of the value of the trade in some circumstances.

Australia is a T+3 market, meaning that the transfer of ownership of the shares and their payment takes place on the third business day after the trade takes place. The funds will then be withdrawn from your account and you become the legal owner of the shares.

Selling is the same in reverse. Find the tab to sell Australian shares, and specify the stock, the number of shares and the circumstances in which you want to sell.

If you’ve gone for broker sponsorship, you will usually then be able to keep track of your whole portfolio of holdings on the brokers’ web site. Usually you can set this to keep track of how much your shares have gone up or down, and their total overall value.

Next month we’ll talk about another crucial step of share investing for beginners: dividends. We’ll also be looking separately at the process of buying from a float, or initial public offering.