This article was first published in the third-quarter 2013 edition of Personal Finance magazine.
Deciding on an online stockbroker is not simply a matter of taking your pick from a list. Nicola Comninos, JSE senior manager: market development, says it is important that you consider all of the following:
Range of products
Some online trading platforms provide access to a limited range of instruments. For example, you may not be able to trade derivatives or, if you can, you may be charged an additional fee for doing so.
However, a limited range of products makes sense when you are starting out, or have limited means.
Simon Brown, chief executive of JustOneLap.com, says if you want to invest directly on the JSE but have less than R5 000 to invest on a regular basis, you should consider starting with the First National Bank (FNB) Share Builder, with its minimum monthly investment of R300, or Standard Bank’s Auto Share Invest, which allows monthly investments of R500 or more.
Costs
Although costs are an important factor in your choice of online stockbroker, Guy Algeo, a director of Imara SP Reid, says it is equally important that you have access to the services you need.
Algeo says that, as a new investor with little knowledge, you may be better off using a full-service stockbroker, with an online platform as a back-up that enables you to check on your investments daily or regularly and improve your knowledge. Online stockbrokers may look cheaper on paper, he says, but full-service costs can be negotiated.
Gary Booysen, of Vunani Private Clients, says online trading has become so competitive that the traditional model of full service has almost merged with online trading.
“Investors should expect full-service brokerage at online rates. These days, almost all stockbrokers are prepared to offer a competitive rate, but it is the value-added services that really differentiate them,” Booysen says.
Brown’s advice is that you consider how often you are going to trade, because you have to balance trading costs and monthly account fees. Some platforms charge higher monthly account fees, but lower trading costs, and others do the reverse. A low-cost option from an online broker may cover only the monthly administration fee, for example, or give you access only to securities listed in a particular sector of a stock exchange, with other trades incurring higher costs.
There are standard share-trading costs that will be collected by your stockbroker on behalf of other parties. These are:
* Securities Transfer Tax of 0.25 percent on purchases only;
* An investor protection levy of 0.0002 percent; and
* A Strate fee (which is charged for the electronic storage of your investments), which is calculated at 0.005459 percent of the value of your shares, with a minimum fee of R10.92 and a maximum of R54.59.
VAT is payable on brokerage fees, the Strate fee and the investor protection levy.
Stockbroking charges in general are based on a percentage of the amount bought or sold, but there is a minimum rand charge. So a trade under, say, R5 000 or R10 000 is going to be more expensive in percentage terms than a larger trade, depending on the minimum brokerage cost.
Most stockbrokers say that R5 000 is the absolute minimum you should have in a portfolio, and no single trade should be below this amount, either. The best guideline for the minimum trade is the amount at which a minimum rand charge will apply. The lower you go below this point, the more expensive your trade will become.
Many stockbrokers have set or recommended minimum requirements for portfolio accounts, based mainly on their fee structures. They include:
* Absa Stockbrokers recommends a portfolio of R10 000 and the same amount per trade;
* FNB Securities (previously BJM Private Clients) recommends a portfolio of R5 000 and the same amount per trade;
* Imara SP Reid recommends a portfolio of R50 000 and R5 000 a trade;
* Investec Securities Online requires R100 000 to open an account;
* Nedbank Private Wealth recommends an initial portfolio of R5 000 and the same amount per trade;
* PSG Online recommends a minimum trade of R5 000;
* Sanlam iTrade requires a minimum of R1 000 to open an account and recommends R5 000 per trade; and
* Vunani Private Clients recommends a portfolio of R20 000 but will accept R5 000.
Stockbroker costs will also be affected by:
* Level of service. Self-service will cost the least. It is likely to cost you more if you want individual advice on trades, or you have the stockbrokerage make the investment decisions on your behalf.
* More complicated trades – for example, those that involve derivative products, such as options and warrants – may cost more than equity trades.
* Real-time prices. Most online brokers provide, free of charge, 15-minute-delayed prices for research purposes, but you receive live prices when you trade. There is a fee for live prices because of the charging structure of the JSE. It charges for real-time prices but not for 15-minute-delayed pricing.
Access to real-time prices is important for a day-trader (someone who regularly buys and sells shares), because the smallest difference in prices can make a big difference to profits or losses.
However, real-time prices are not a priority for someone who invests, say, once a month and/or holds a portfolio for the medium to long term. In most cases, it will needlessly add to your costs. You will receive real-time prices when you trade.
An issue you should take into account with live prices are the price levels – in other words, how many trades you will see. For example, you may see only the last traded price, or you may see the previous five or more prices, all of which will probably have happened in seconds, depending on the liquidity of a security (how often it trades).
The online brokers that offer real-time pricing (and their costs) are:
– FNB Securities: free, but it is to review this soon.
– Imara SP Reid: R100 a month.
– Investec Securities: real-time at R80 a month, or quoted pricing, with the first 100 free and then 0.12 percent of the price, up to R80.
– PSG Online: R99 a month, but waived for investors who trade three or more times a month.
– Sanlam iTrade: 130 live feeds a month, or R50 a month for unlimited streaming.
– Standard Bank Online: live streaming at R99 a month, plus live share and index quotes, which are charged at nine and seven cents a quote respectively. Live share prices with the five best bids and offers on the trade and quote pages are charged at 15 cents. These are snapshots of the price of the share when you refresh the computer screen. These prices are available (and chargeable) between 8.55am and 5.20pm on market days only.
– Thebe Securities: available at JSE cost.
– Vunani Private Clients: JSE data at cost, but free if you do five or more trades in a month.
* How you give instructions to trade. For example, by telephone, rather than using the online platform.
* Security. This includes being kept informed, in print or electronically, about activity on your trading account, such as order confirmations.
* Provision for information, such as tax clearance certificates, capital gains tax (CGT) statements and share valuations for estate duty purposes.
* Levies on interest. The stockbroker may charge a separate levy on interest earned on the cash held in your trading account. The money may be held in the JSE trust account or a money market account. The rates paid on money market accounts vary, with a low rate, in effect, serving as an opportunity cost.
Table 2 (link at the end of the article) provides the costs (excluding VAT) charged by online platforms for equity trades conducted without assistance from a stockbroker’s portfolio managers. The costs for other trades, such as for derivatives, bonds, Krugerrands and offshore investments, are likely to be different.
Your portfolio
You should be able to access your port-folio easily. You should also be provided with information such as costs, current prices, your current profit or loss, your income history (interest and dividends), the balance in your trading account and your tax liability (in particular, CGT, but also interest earnings and dividends tax).
Services
You should take into account the facilities offered to manage your portfolio (see Table 3, link at the end of the article). These include:
* Discretionary or non-discretionary. These are the two main divisions in the level of service that you can receive from a stockbroker:
– A non-discretionary trading account is where you are responsible for making the trading decisions. You may still call your broker and ask for his or her opinion, for which you will probably pay a fee. However, you take responsibility for all your trading decisions. You may be able to choose to place your orders telephonically or through your chosen online platform and relative costs will vary, depending on the stockbroker and the instruments traded.
– A discretionary trading account is where you give your stockbroker or another person or institution the authority to buy and sell securities on your behalf, at their discretion, or subject to pre-set restrictions. For example, you may permit only investments in listed equities or limit the number of trades a month.
A discretionary service is more expensive than a non-discretionary service, but both will carry different levels of costs depending on such things as how much money you have invested, the number of trades and the number of services you require.
* Tradable securities. Online brokers such as Imara SP Reid and PSG Online offer access to a wide range of securities, including equities, bonds and derivatives, on both the JSE and foreign exchanges, whereas others, such as Absa Stockbrokers, limit access to the JSE equity market, including shares, warrants and exchange traded products.
* Email and SMS alerts, such as when there is a rapid movement in the price of a security.
* Alerts of dividend payments, particularly if you want to reinvest rather than leave your money sitting idly in a cash account.
* Alerts of corporate actions, such as rights offers to buy more of a company’s shares.
* Stop/loss facilities, where a sale will be triggered if the price of a security drops below a certain level. This can be based on an actual price being reached or on a percentage of a price over a period of time
Online brokers that offer this facility include FNB Securities, Imara SP Reid, PSG Online, Sanlam iTrade, Standard Bank Online, Thebe Securities and Vunani Private Clients, all at no cost. Those that do not offer this facility are Absa, Investec (although it plans to offer it) and Nedbank Private Wealth.
* Access to current and historical data, such as share prices and market indices, as well as current and past SENS. (SENS is a JSE facility on which all announcements must be made about listed securities. These announcements can range from company warnings about lower-than-anticipated profits, to dividend declarations and company mergers. The aim is to make information available to all investors and potential investors simultaneously.)
* Historical data on listed security prices and index movements. This includes graphs that show intraday trades and the long-term trends of individual securities and their benchmark indices.
* Daily reports on the JSE and its market segments.
* Tax information. It is important that you know the tax consequences of your investment decisions. Although an online broker pays dividends tax on your behalf, you are responsible for paying tax on interest and capital gains and, if you are classified as a share-trader, income tax on your profits.
You must find out if you will be provided with reports that you can use to complete your tax returns. You also need to know how CGT is calculated – on a first-in, first-out basis, or using the weighted average.
First in, first out means the capital gain/loss is calculated using the first trade/s you made to purchase the securities as the base price and the price you receive on the first sale. This is the more complicated method, because the number of securities in each trade when you buy and sell may not correspond, and may involve a number of different trades.
The weighted average uses the price you have paid on average for a particular security as the base price.
Brokers that provide tax information include:
– FNB Securities: tax certificates with CGT based on the weighted average;
– Imara SP Reid: tax certificates on request based on client parameters;
– Investec: tax certificates on request;
– Nedbank Private Wealth: tax certificates with CGT based on the weighted average;
– PSG Online: tax certificates with CGT based on the first-in, first-out basis;
– Sanlam iTrade: tax certificates including capital gains/losses;
– Standard Bank Online: tax certificates including capital gains/losses;
– Thebe Securities: tax certificates on request; and
– Vunani Private Clients: tax certificates with CGT calculated on the weighted average basis.
Education
It is important that beginner investors choose a platform that provides integrated assistance or education, Comninos says.
The JSE provides extensive education via its website and webinars, and at the public events it hosts with stockbrokers, for which there is no charge. JustOneLap.co.za also provides free education.
Standard Bank and PSG Online have a reputation as leaders in the education of new and experienced investors. They both host webinars and seminars, often bringing in outside experts.
Vunani Private Clients holds classes in its offices and offers its clients “shoulder-to-shoulder”
experience with a professional in a live trading environment, which, Booysen says, makes investors “infinitely more prepared to face the often turbulent investment landscape”.
An important aspect of education, particularly for new investors, is the availability of trial runs using phantom portfolios or having free initial access to an online platform. By signing up on more than one platform and taking advantage of the trial period, you will be able to compare the platforms for their ease of use and the facilities and services they provide. The following platforms provide this facility:
– FNB Securities: trial period of one week;
– Imara SP Reid: two months;
– PSG Online: one month;
– Sanlam iTrade: for the rest of this year if you “like” its Facebook page;
– Standard Bank Online: the first month is free with no obligation to put money into the account until you trade, allowing you to review the site and close the account within the month; and
– Thebe Securities: temporary sign-up is available for an unspecified period of time.
Research
The availability of research material should play an important part in your decision on which platform to select. You need to establish whether comprehensive research is available and whether it comes at an extra cost. Research can include a wide range of services.
Probably the most important research is into companies, leading to conclusions such as whether to buy, sell or hold a share.
However, research should include the information provided by FNB Securities, which provides all the facts and includes:
– A daily morning note that covers, among other things, company announcements, the outlook for the day, investment stories and market commentary;
– A weekly economic update and commentary on resources;
– A monthly newsletter and wrap-up; and
– Ad hoc technical notes with trading ideas, notes about special events, such as the national budget, and “hot topics”, access to past SENS announcements, historical stock prices, market indices and company annual reports.
Analytical tools
Many investors use computer-based tools to help them analyse the markets and investment instruments. Online stockbroking platforms offer tools for both fundamental analysis and technical analysis. Comninos says you should assess these tools for their ease of use and the extent to which they have been integrated into the platform.
Financial website Investopedia defines fundamental analysis as a method of evaluating a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. These factors encompass everything that can affect the security’s value, including macro-economic factors (such as the overall economy and industry conditions) and company-specific factors (such as its financial condition and management).
Investopedia says technical analysis is based on past market prices and technical indicators. Technical analysts believe that short-term price movements are the result of supply and demand forces in the market for a given security. The nature of the security is less relevant than the current balance of buyers and sellers. Based on the careful interpretation of past trading patterns, technicians try to discern this balance with the aim of predicting future price movements. A large toolbox of analysis techniques and indicators are used to confirm a technician’s hypothesis about where the markets are headed.
Ease of use
Although ease of use is the most subjective element when choosing an online platform, Comninos says it may be the most important. If you find that one platform is easier to navigate and more intuitive than the others, this is certain to become an important factor in your decision, she says. This highlights the importance of trying out as many platforms as possible before making a decision.
International access
More and more investors are taking money abroad thanks to the gradual easing of exchange controls and the increase in the offshore investment allowance to R4 million. However, stock market investors want to be able to operate without having to deal through offshore entities. Increasingly, local stockbrokers are offering facilities to trade offshore, but not all do so online. The online platforms that offer this service to a greater or lesser degree include Imara SP Reid, PSG Online and Sanlam iTrade.