When you begin your adventure into the world of online share trading, your chosen share-trading platform can have a major impact on the way your investments perform. Some platforms provide the basics, while others come with all the bells and whistles. Some charge a lot for a one-off trade, while others charge a little. Some let you trade stocks and investments from all over the world, while others keep you closer to home. So if you're new to online share trading, here's our proposed checklist for choosing the right platform for you.
What does it cost to start trading?
The first thing you'll probably look for when you compare platforms is how much it costs to trade. You'll notice from our comparison tool that some platforms charge as little as just $15 a trade. However, the headline rate only tells part of the story. If you're serious about comparing platforms, you need to dig deeper.
What does your trading strategy look like?
To get started, first ask yourself why you're trading in the first place - what is your investment strategy? Do you intend to buy a small number of blue chip Australian stocks or will you be looking to invest in overseas shares too? If you limit yourself to the Australian Stock Exchange (ASX), you're limiting yourself to only 2% of the world's listed companies. You're missing out the chance to invest in some of the leading brands in areas such as technology (Apple and Google etc) or even other industries, such as pharmaceuticals etc. That said, you'll avoid any adverse currency fluctuations and may have a deeper understanding of the business and its operations. You should also ask yourself at this point whether you want to invest in other assets - such as exchange traded funds (ETFs), options, managed funds and commodities - as well as shares. Not all platforms will offer you the opportunity to trade each of these assets.
Do you want to borrow to invest?
Once you've worked out what you hope to achieve, the next question to ask is how you intend to fund your investing. Will it be from your own savings? Or do you intend to take out a margin loan to buy shares? If you don't intend to take out a loan, a low-cost, basic platform may be adequate and save you money. However, if you do plan to take out a margin loan you should consider a more comprehensive platform that includes the capacity to borrow and manage your loan, as well as your investments, in the one place.
How important is the support you receive?
As a novice investor, you might want a guiding hand through the trading process. That may include trading tips, education and data-covering trends. Some online brokers pride themselves on offering clients a one-stop shop when it comes to understanding both how to invest and the investments themselves. Others act as the facilitator of your trades but leave you to do your own research and analyse the data. Again, if you're only after the ability to trade, a basic trading platform will suffice. However, if you want some guidance on what you're doing, jump into a more comprehensive service. You should also consider the level and quality of support you'll receive. For instance, if you intend to trade or research your investments in the evenings, you'll probably want to be sure your online broker is still open.
How much - and how frequently - will you be trading?
The volume and frequency of your trading habits are key factors in finding a platform that suits you best. This is because different platforms have pricing structures that suit different types of investors. Some platforms charge a flat fee regardless of how often or how much you're trading. Others offer discounts if you trade often or if you trade over a certain amount. Some platforms also have minimum trades, which may rule them out altogether if your strategy is to actively trade small amounts.
How much choice do you need?
Finally, some platforms don't only offer overseas stocks. They also provide access to a wide range of assets and products, including options, ETFs and derivatives. These can complement your share trading and help balance your investment portfolio. Some, such as contracts for difference (CFDs), can even let you make money when the price of an asset falls. Here's a handy guide of the key share trading terms to avoid any confusion. That said, if you're a newbie investor looking for simplicity when making a decision, you may find a more sophisticated trading platform overwhelming. So it all comes down to what's most important to your circumstances. Just as no two investors are identical, no two platforms are identical either. The best platform to begin trading on will come down to how you want to use it, what assets you want to trade and what support you'll need, as well as price.
Key terms to know about online share trading
Ask/offer
This is the price the owner of shares is willing to sell them for. When you start online share trading, you'll see the offer or asking price of each share listed.
Bid
This is the highest price a potential buyer is willing to offer for a share.
Blue chip stock
A blue chip stock is a share in an established company that has a proven earnings history. The opposite of a blue chip stock is a speculative share. Generally, blue chip stocks offer stability and sometimes a regular dividend payment. For this reason, they're usually considered low risk. However, because investors tend to factor this into the price they will buy or sell for, blue chip stocks won't always offer the same opportunity for high growth as speculative shares. Keep this in mind when considering which shares to buy.
Dividend
A dividend is a payment a company makes to shareholders out of its profits. While they often take the form of cash payments, dividends may also be extra shares. Shares that pay a regular dividend are highly prized by investors looking to make an income. Alternatively, investors looking for long-term growth often choose to reinvest any dividend payment by buying more shares.
Diversification
A strategy used to reduce risk, diversification is the act of buying investments with different underlying characteristics in the hope that they won't rise and fall at the same time. For instance, you can diversify by buying shares from different regions, sectors or industries.
Loan to value ratio (LVR)
This measures the amount of a loan compared to the value of the security it's borrowed against. When you take out a margin loan, your lender will have a maximum LVR it allows.
Margin call
If you take out a margin loan and the value of your security (your shares) falls so that you owe more than the maximum LVR plus a buffer, you will face a margin call. When this happens, you usually have 24 hours to bring your LVR back under the maximum by contributing more cash, offering more security or selling shares.
Margin loan
A margin loan lets you borrow money to invest in shares, managed funds or other assets. Generally, you'll need to offer those investments - and potentially cash - as security for the loan.
Option
This gives you the right to buy (a call option) or sell (a put option) a share at a specific price for a set period of time. You can buy a call option if you think the price of a share will rise and a put option if you think the price will fall.
Price/earnings (P/E) ratio
This measures a share's price compared to the company's earnings for the previous 12 months. Generally, companies expected to achieve high growth will have a high P/E ratio, whereas those that have more stable earnings will have a lower P/E ratio.
Share portfolio
Your share portfolio refers to the total of the shares you hold. Looking to start online share trading? InfoChoice can help you search and compare online brokers by providing useful information such as monthly account service fees and accessibility. InfoChoice recommends that, before you make any financial decision, that you seek professional advise from a qualified adviser. For further information please read our InfoChoice Financial Services & Credit Guide.
