Online sharebroking - An easy way to lose money?
The rapid growth in the number of online sharebroking services offered in New Zealand is great for getting people to buy shares, but there are questions about whether they encourage sensible investment decision making.
Sunday, June 11th 2000, 12:00AM
What's good about online broking is that it encourages people to put their money into shares as opposed to bank deposits, (that's good because shares provide the best returns over the long-term), plus it is helping to get New Zealanders to do more than just thinking about saving.
Another plus is that it increases the proportion of the market that is owned by locals. Currently, offshore investors own the majority of the market and they have proved to be fickle. They may like New Zealand one minute, but if a more attractive opportunity shows up somewhere else in the world they will sell up and move.
It's hard to gauge how many New Zealanders are signed up to online broking services, and how many of the 65,000 trades made each month are done over the Internet.
The Stock Exchange can't provide figures, and its member firms that offer Internet broking also provide traditional services such as taking orders over the phone.
What is clear though is that online broking is becoming a fiercely competitive area. Already two banks, ASB and Bank of New Zealand offer online trading, sharebrokers such as Direct, Access and DF Mainland offer services and these are available made available through other websites such as Unity Direct and Sharechat.
Online trading is popular for two reasons: price and access.
Generally trades, no matter what size, can be transacted for between $25 and $30, rather than being charged on a commission basis.
What's more it's removed the need to actually talk to a broker. This, as explained later, is good and bad.
However, the major risk with online trading is that it turns people from investors into gamblers.
This was clearly articulated by United States Securities and Exchange Commission chairman Arthur Levitt recently
"As far as I’m concerned, for most individuals, the stock market is best used for investing, not trading. And, it’s important to make that distinction. Online trading may be quick and easy; online investing – and I emphasise investing – requires the same old-fashioned elbow grease like researching a company or making the time to appreciate the level of risk."
"I’m often surprised by investors who spend more time deciding what movie they’ll rent than on which stock to buy."
JB Were private client manager John Cobb says investors need to think of the share buying process as a pyramid.
The base of the pyramid, which represents the biggest decision and the one that adds the most value to the transaction, is in fact the research.
The top of the pyramid, which is the smallest value add in the process is the execution of the buying decision.
Online broking is promoted to the public on its low price, yet in the overall equation it is not the major issue they need to be concerned with.
Mr Levitt also expresses concerns about the growth in the number of people who are adopting day trading strategies.
"I am concerned that more and more people may be undertaking day trading strategies without a full appreciation of the risk and difficulty involved," he says.
"No one should have any illusions of what he is getting involved in. I know of one state that recently found that 67 out of 68 day traders at a firm had in fact lost money."
The other issue that has come to light is that people are holding shares for a much shorter period than before.
A report in the London Financial Times recently said that the average holding period for equities in the US has fallen from two years to 250 days in the past 10 years.
Whakatane-based sharebroker Brent Sheather says investors in New Zealand who embark on a trading strategy face the risk of having to pay capital gains tax on their profits.
"Various rulings by the Inland Revenue Department suggest that if you buy and sell shares frequently - more than 5 or 8 times a year - you could be liable for capital gains tax on your profits.
"That could really take the fun out of clicking your mouse too often," he says.
Secondly, he says, offshore experience shows that online sharebroking seems to appeal most to individuals who trade frequently in their domestic market.
New Zealand is a strange market internationally as the top 10 companies account for more than half of its capitalisation, and the companies tend to offer investors high income through dividend yields, than growth through share price appreciation.
"Each of these markets (Australia, US and United Kingdom) has a much broader and diverse range of companies listed therein than that of New Zealand, and typically individual investors in these countries have a much higher proportion of their equity assets invested locally," he says.
"In New Zealand, because of the narrowness of our economy, the lack of local representation of key sectors, and poor historical performance it makes sense for locals to invest a much higher proportion of their funds offshore.
"In New Zealand this is typically done through unlisted unit trusts," he says.
The exception to this is the Australian market that is increasingly being considered as part of the "local" market by New Zealand investors.
While it is possible for New Zealanders to invest in offshore markets, other than Australia, through the Internet there are additional risks, Mr Cobb says.
JB Were's experience has been that many of the offshore brokers have delivered poor execution of trades.
"If there is anything slightly out of order you can't get any service," he says.
An added frustration in the US market is that the online broking systems can't keep up with all the stock splits and name change which go on amongst listed companies.
The other problem is that New Zealanders are asleep while the main offshore markets are open. Therefore they have to put their order in before they go to bed and hope, when they wake up, the markets haven't suffered a major correction.
Mr Sheather says another of the problems is the inference that by providing customers with online research and immediate access to company news, traders are somehow empowered and thus have the ability to trade profitably.
"However appealing this scenario is, making money on the stockmarket is just not that easy. What you need to "beat the market" is information that no one else has got and with everybody "online" and charting their favourite stocks there is not much chance of this."
"For sure the Internet permits investors to know more about what they're buying – it does not however permit knowledge of this information to translate to an ability to buy and sell profitably," he says.
Although online sharebroking has some risks for the unsuspecting investor, it also poses a threat to the traditional managed fund industry.
Investors can now create and trade their own portfolios of stocks for about the same cost or less than fund managers.
This competition means that fund managers need to create better performing, lower cost funds to stay ahead of the man in the street.
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