CHAPTER 5
How to buy and sell shares
Before you can buy your first share on the sharemarket you need to find a stockbroker to act on your behalf. Only authorised market participants can buy and sell shares on the ASX.
Stockbrokers
There is a range of stockbroking firms and some have offices in regional centres as well as capital cities. Furthermore, online trading means there are many brokers offering services over the internet.
When advising clients, stockbrokers are legally obligated to take into account the financial situation and investment objectives of their individual client investors. A good adviser is one who understands your needs and speaks your language.
A stockbroker acts as your agent
Only stockbroking firms or their authorised representatives are able to buy and sell shares on the sharemarket. While other investment advisers may offer to buy and sell shares, ultimately these transactions can only be effected through an authorised market participant.
Stockbrokers and the client advisers employed as their representatives act as your agent in the sharemarket, providing advice and buying and selling securities on your behalf. While their advice may be provided free of charge, brokerage fees are charged for any buying or selling transactions.
All stockbroking firms must have a dealer’s licence, which allows them to deal in securities. The authorised representatives (client advisers) they employ must be well qualified and up to date in their knowledge of sharemarket products and services. As mentioned, an important part of the role of client advisers involves knowing the financial situation and investment objectives of their clients.
A stockbroker to suit your needs
Not all stockbroking firms are the same. Choosing the best one for you will depend on the investment advice and additional services you need. While a few stockbroking firms concentrate largely on institutional business and focus on major fund managers, other stockbroking firms cater to private investors and have specific services and teams of client advisers dedicated to meeting their needs. You should make your selection on the basis of location, cost and, most importantly, the services and expertise provided.
Keeping these factors in mind, there are also other considerations when choosing a stockbroker, such as:
- Do you want a large or a small firm?
- Is your main concern the cost of brokerage?
- Do you want to trade online?
- Do you want advice and guidance?
Large versus small stockbroking firms
Many of the services provided by stockbroking firms require substantial resources, including a large number of staff. This is especially true of firms that conduct their research in-house, a process that requires a number of industry analysts to prepare reports and forecasts on individual companies.
Nonetheless, you may find that smaller stockbroking firms offer a more personalised service, focusing on your individual requirements while still providing access to professional research material, underwritings and other areas of investment.
Discount and internet stockbroking firms
Discount and internet stockbroking firms offer trading services only, meaning they will execute buy and sell orders on your behalf but they will not offer advice. Many of these firms charge a discounted rate of brokerage or a flat fee, depending on the size of the transaction. The rate may be discounted even further if orders are placed via the internet rather than by speaking to someone directly. Once they have an account with an online stockbroking firm, investors can access their online broker, place an order and monitor their portfolio, all with the click of a mouse. The service can be quick and easy to use once you have mastered the system. The benefits of trading online include easy access; low trading costs; and access to live share prices, research and market commentaries.
Some discount broking firms also offer research information, for which there may be a charge. Others have a pricing structure that includes monthly subscription fees, which allows investors to access the broker’s research and market commentaries.
Obviously, one of the main advantages of using discount, non-advisory brokers is the low trading cost, but the disadvantage is that they don’t give advice. A discount stockbroking firm may suit your needs if you prefer to make all your investment decisions yourself and have the time and resources to conduct your own research and analysis.
Full-service stockbroking firms
The main feature of full-service stockbroking firms is that they offer guidance and advice.
If you decide to use a full-service broker, you will be expected to answer a series of questions. This is because, when making recommendations, stockbrokers are obligated by law to ‘know their client, know their product’. As a private client, you must therefore be prepared to provide your adviser with personal information.
You will be asked to provide information about your investment objectives: details of your need for income, capital growth, security, liquidity, your readiness to convert investments to cash and any proposed investment time frame. They will ask you about your income, your assets, your liabilities and your expenses. Importantly, they will want to know your appetite for risk.
Armed with this information, your adviser will be able to recommend the investment alternatives most appropriate to your specific needs and objectives. If this information is not provided, a stockbroker will only be able to provide a recommendation based on what is known of your situation.
Finding a broker
The Find A Broker service is available from the ASX website (www.asx.com.au). Alternatively, telephone ASX customer service on 131 279 to use the stockbroker referral service. You will be provided with the contact details for a number of stockbroking firms suited to your particular needs. It is advisable to contact each of them, outlining your needs and objectives, before deciding which firm or adviser you feel most comfortable with. After deciding on a firm, make an appointment to meet your adviser, as this individual may have a strong impact on your financial future.
Is my broker a ‘participant’?
When looking to use the services of a stockbroking firm, you might like to check that it is a ‘Participant of ASX’. These brokers come under the direct supervision of ASX and ASIC. They may also be participants of other licenced markets in Australia — for example, ‘Participant of Chi-X Australia’.
There are other businesses that offer advice on buying and selling shares and they may offer a service to buy or sell your shares on your behalf. However, businesses that are not participants of a licensed market may not enter orders into the market. Instead they must go through a participant. You should establish the status of any party you deal with as certain compensation regimes are only available to clients of participants. Further information about the National Guarantee Fund can be obtained from Securities Exchanges Guarantee Corporation Limited at www.segc.com.au.
The process of buying and selling shares
You should always take your time before making investment decisions and placing orders with a stockbroker. However, once you have made up your mind, the actual process of buying and selling shares is easy because the stockbrokers do most of the work, regardless of their location.
Placing a buy or sell order is a straightforward process and trading takes place automatically (depending on liquidity for the share). Once the trade has taken place, you will receive a contract note (also called a confirmation) confirming any transactions and details for settlement. You will also receive a holding statement from each company’s sub-register.
If you have registered through CHESS (we explain this system later in the chapter), whenever you buy or sell shares, CHESS maintains an electronic record of the transaction. A supplementary paper record, similar to a bank statement, will be mailed to you one month after the transaction has taken place. (There are no paper share certificates.)
Steps to buying and selling shares
There are two sides to every transaction. On one side are the buyer and the buyer’s stockbroking firm; on the other, the seller and the seller’s stockbroking firm. When you buy shares in companies listed on the ASX, you are buying them from investors who own them. You are not buying them from your stockbroker, or from the company itself.
Figure 5.1 (overleaf) summarises the standard procedure for a share transaction. The process is then expanded on over the following pages.
Figure 5.1: steps in a share transaction
Unless you are interested in one of the more speculative companies (where large share price movements may occur quite suddenly) or you are considering buying shares in a float (in which case the application date becomes critical), there is usually no need to hurry your investment decisions.
Before placing your order, you should first check your financial situation and confirm that the proposed transaction suits your objectives. Then, when you are happy with your adviser’s recommendation and/or your own research, you simply need to instruct your adviser to go ahead and buy or sell a particular number of shares on your behalf. Most stockbroking firms require you to forward the necessary funds before they will accept your first order to buy shares.
To start trading through an online broker, all you have to do is register with the broker and establish a cash management account or a direct debit or credit facility with a bank account. Once you have logged on, select the shares you want to purchase or sell using the ASX code, specify the number of shares, then enter the required buy or sell price before executing the trade.
With a full-service broker, once your relationship and account have been established you can place orders to buy and sell shares over the telephone. The stockbroking firm will invoice you later for the transaction.
When placing an order with your broker, it is a good idea to find out the current market price of the shares. Your adviser should also be able to tell you how many buyers and sellers are in the market for the shares and how they have traded over the day. You can also access this sort of information through most internet brokers. If placing orders over the phone, tell your broker the details of your order (company name and type of shares, number of shares and price at which you wish to buy or sell). Your broker should then repeat your order back to you.
The trading process
Once your order is placed, the trading process begins. Your stockbroker will enter your order into the market. The system will then compare buying and selling orders entered into the market and automatically execute trades in strict price–time priority whenever two orders match. Every order is processed on an equal basis and larger investors do not get priority.
Your adviser will not necessarily call you when your order has been filled. However, if you place your order very near the market price of the shares, it may be filled while you are on the phone. Once you have placed an order and the transaction has taken place, you are required to fulfil your side of the transaction.
Your stockbroking firm will issue a contract note advising you of the details of the transaction. You may receive this soon after the transaction or it may be emailed to you at the end of the day. You should retain each contract note for your tax records, after first checking the following details:
- the company and type of shares
- the price at which the shares were traded
- brokerage.
The cost of your shares
You must pay for any shares you purchase within three business days after the transaction (this system is called T+3, meaning trade date plus three days; at the time of writing work was underway to go to T+2). Your costs will include the price of the shares and the brokerage payable to the stockbroking firm. Brokerage is also payable when you sell shares.
Brokerage
Brokerage fees differ between stockbroking firms. They are generally determined by the range of services offered, with higher fees often being charged to support research functions and other services.
Some firms charge a flat fee for transactions up to a certain limit, and most firms charge a minimum fee for all transactions. At the time of writing, minimum and flat fees range from approximately $20 (for online brokers) to $120 (for full-service brokers) per transaction.
You may be able to negotiate a particular scale of fees with your client adviser based on the volume of business you do. While some firms charge up to 2.5 per cent brokerage on smaller transactions, many firms charge between 1.5 and 2.0 per cent for the same service, with the percentage often reducing on transactions of higher value.
Completing your sharemarket transactions
As well as getting you set up with a trading account, your broker will also assist you in getting set up for settlement. You need to do this because when you buy or sell financial products such as shares, you must exchange the title or legal ownership of those financial products for money.
We will first explain the settlement process and then go through what you need to do.
Settlement occurs automatically three business days after a trade takes place. A system called CHESS (which is explained later in the chapter) automatically undertakes two simultaneous processes:
- payment is made for the trade by electronic transfer from the buyer to the seller
- the legal ownership of the share is transferred from the seller to the buyer.
This process is referred to as ‘delivery versus payment’ (DvP). The settlement process is handled by a settlement participant, who may be your broker or an agent contracted by your broker.
Which sub-register?
Any change of ownership needs to be recorded.
Your broker may ask you whether you want to be ‘broker sponsored’ or ‘issuer sponsored’. If you choose the former, your shares will be held on the ‘CHESS sub-register’. If you choose the latter, your shares will be held on a sub-register sponsored by the issuer of the shares that you have bought.
What’s the difference?
If you opt for broker sponsored, all of your holdings can be consolidated on the one broker-sponsored account, making it easy to track your holdings and change any details — but you must trade through that broker while the shares are sponsored that way.
If you opt for issuer sponsored, you can easily trade through any broker but you will have a separate issuer-sponsored holding for each of the shareholdings.
You can have more than one broker sponsoring different shares within your overall portfolio. You can also switch shares from being broker sponsored to issuer sponsored, or vice versa, or from being sponsored by one broker to being sponsored by a different broker.
HINs and SRNs — the account numbers that identify your shareholdings
If you elect to go broker sponsored you will be provided with a HIN (Holder Identification Number) by your sponsoring broker. You will receive a different HIN for each broker.
If you elect to go issuer sponsored you will be provided with an SRN (Security-holder Reference Number) and you will have a separate SRN for each holding that you nominate as issuer sponsored.
In practice this can work as follows:
- You are broker sponsored and own shares in BHP, Telstra and NAB: you have one HIN.
- You own shares in BHP, Telstra and NAB and each of these is issuer sponsored: you have three different SRNs.
You can choose to have some holdings broker sponsored and other holdings issuer sponsored. In this case you would have one HIN and individual SRNs for the issuer-sponsored holdings.
It is important that you have your HIN and your SRNs recorded and handy as you will need these details when you contact your broker and company share registers.
Share registries
When you buy shares in a company, your ownership is recorded on that company’s share register.
A company’s share register is made up of all the shareholdings on its CHESS (broker-sponsored) and issuer-sponsored sub-registers combined.
The company’s share registry looks after its share register and handles most of the dealings you will have with the company you have invested in.
You will be asked by the registry to provide banking details so that any payments such as dividends can be paid into your bank account. Company reports will be provided to you via the share registry as well as forms for voting on matters that require shareholder approval.
Many things can be managed online through the website of the share registry, although some matters may require written confirmation by the shareholder before they will be actioned by the registry (a change of address, for example).
Depending on how many companies you own shares in and the number of associated registries involved, you may have dealings with a number of share registries or just one or two.
Changing brokers
You may want to change stockbrokers at some stage. From a settlement administration perspective changing broking firms is straightforward. If your shares are issuer sponsored, you will need to complete a new client agreement form and provide some of your personal and financial details and the relevant SRN to your new broker.
If you have a HIN and you want to change your broker sponsor, this is possible; however, a fee may be applicable. Talk to your broker or ASX Customer Service for details.
CHESS statement explained
CHESS (Clearing House Electronic Sub-register System) is an electronic transfer and settlement system that has brought significant improvements to the Australian sharemarket. Securities of more than 2000 listed companies are held on CHESS.
Whenever you buy or sell shares involving a CHESS holding you will receive a CHESS holding statement, which confirms the transaction. Likewise, whenever you buy or sell shares involving an issuer-sponsored holding you will receive an issuer-sponsored holding statement.
CHESS, on behalf of companies, issues holding statements to uncertificated shareholders who are sponsored by brokers or institutions that participate in CHESS. (A separate statement is issued for each security held in CHESS.) Figure 5.2 shows a sample CHESS holding statement. The main features of the statement are:
- The company’s name and logo.
- Your name and address as registered in CHESS.
- The security to which this statement relates.
- The date the transaction is recorded in your CHESS holding.
- The description of the transaction.
- The transaction ID — this is a supplementary reference and may be useful for enquiries.
- Information section — important messages will appear here.
- The details of your CHESS sponsor — this is your first point of contact for any queries.
- Your holder identification number — this is your unique CHESS number. Keep your HIN confidential and only disclose it in dealings with your CHESS sponsor.
- Your balance in the security after being adjusted by the transaction.
- The number of units that will increase or decrease your balance.
- The ex/cum status — if the transaction was processed in the ex-dividend or cum-dividend period, it may appear here. (Note: ‘cum’ means ‘with’; ‘ex’ means ‘without’.)
Figure 5.2: a sample CHESS holding statement
As mentioned, a statement is issued whenever the holding balance of a security has been altered by a transaction during the month.
Ex/cum dividend
To be entitled to a dividend you must purchase a share before the ex-dividend date. Purchasing on or after the ex-dividend date means you will not be entitled to that dividend.
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If you want to do your own buying and selling you will need to know what the market looks like on the screen of your online broker. Even if you decide to use an adviser to place your orders on your behalf you should still be able to understand and read the screen. So chapter 6 talks you through your first trade.