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Are you a frequent trader? Beware monthly fees Beware of extra fees Beware off-market offers for your shares Can you claim 'professional trader' deductions? Check cash account requirements Check the level of 'international' access Check your rego Consider float offers carefully Consider the size of your trades Don't pay entry fees on managed funds How deep is your research? How timely is your price data? Make sure trading tools suit you Market correlation....is there any.... Stay vigilant Take tax into account for investment planning Tax advantages of borrowing to invest Understand straight-through processing
1. Are you a frequent trader? 2. Beware monthly fees Look out for monthly subscription fees which will apply wheter you trade or not during the period. Check what you get for your money. Such services may not suit infrequent traders. 3. Beware of extra fees For services beyond the standard buying and selling of ordinary shares on the ASX, check what fees apply, eg. for options and margin trading. 4. Beware off-market offers for your shares Be wary of unsolicited offers to buy your shares. A number of operators flood small investors with mailed offers to buy their shares in public companies - usually at a price well below the market. The Australian Securities and Investments Commission urges shareholders to fully investigate these offers. While the practice is legal investors should check out the real value of their shares and whether it's wise to sell or hold. Try to find out why the offer is being made. Know your shares' value now and get an idea of their future prospects. Something may be about to happen to the shares that the investor doesn't know about. 5. Can you claim 'professional trader' deductions? Those who claim share trading as their profession rather than just being an investor must convince the Australian Taxation Office before they can claim trading losses as tax deductions. The ATO warns there are strict criteria to be met for someone to be classed as a share trader following confusion amongst investors who have incurred losses and then tried to offset these against their other income. 6. Check cash account requirements Before you sign up, check the account opening requirements of the brokers. These may involve initial deposits of up to $5,000. And can you monitor your balance in this account online? Some brokers allow you to buy up to $25,000 worth of shares in Top 150 companies without having the cash in your account until settlement (T+3). 7. Check the level of 'international' access Access to international shares generally only means the main US exchanges, NYSE (Wall St), NASDAQ and the American Exchange. Access to Asian and European exchanges is growing but if that's what you want, you may have to hunt around for it. 8. Check your rego If you've acquired shares in previous floats you may need to transfer CHESS registration of these securities to your online broker before you can sell them. 9. Consider float offers carefully If allocated shares in a float by your broker, consider first whether they suit your investment strategy before accepting. Don't just buy in because you have privileged access to new listings. 10. Consider the size of your trades When comparing fees among brokers, consider the likely size (dollar value) of your trades. Fee scales can vary considerably so that a broker who is cheap for smaller trades may not be at higher levels. 11. Don't pay entry fees on managed funds If you want to buy managed funds online through your broker, check that they will rebate the standard upfront entry fee charged by fund managers. If they're not giving you advice on fund investment, this fee should not be charged. 12. How deep is your research? Check what the broker offers in company profile and recommendation report information - just how detailed is it? 13. How timely is your price data? So-called 'Real time' market price data offered via a website is not always instant - it can be delayed by minutes. Even when it is not delayed, you must refresh the page in your browser to see the latest prices. If you really want to be sure you are seeing up-to-the-second prices, get 'dynamic' data which updates on the page before your eyes without you having to refresh the page. This is usually a more expensive option. 14. Make sure trading tools suit you Make use of watchlists, market depth and charting tools to help you analyse stock peformance. However, before committing to a broker check that any charting and portfolio management software on offer suits your needs - packages can vary considerably. 15. Market correlation....is there any.... By Karl Siegling Having recently travelled in the USA and Asia presenting to investors, I was surprised how often I was questioned on the correlation between the Australian market and the US market, as well as Asian markets, in particular China. Over time I have come to the view that highly technical and complex discussions and analysis on correlation are fraught with danger. I have always found it curious that the first thing many Australian investors check is the overnight performance of the Dow Jones Index. When we check this index we are actually determining how the top 30 stocks in the USA performed overnight. A better measure would be how the S&P 500 has performed overnight - at least this is a basket of the top 500 stocks listed on the US Stock Exchange rather than a basket of 30 stocks. Nonetheless, this analysis is still rather limiting. How should the Australian market perform in relation to the top 30 or top 500 stocks listed in the US? How related are the companies listed on the Australian Stock exchange to those listed in the US? What percentage of the S&P 500 consists of resources stocks, what percentage are financial services? What percentage of the US index consists of technology stocks? This analysis quickly creates more questions than it does answers. The correlation problem prompted me to find out what the performance of the US market (S&P 500 index) has been over the last ten years, relative to the Australian Market (All Ordinaries Accumulation Index). Interestingly the US markets significantly out-performed the Australian market during the 'technology boom' of the late 1990's and 2000 and significantly underperformed the Australian market from the middle of 2000 to around early 2003 during the 'technology bust'. Since 2003 the Australian market has outperformed the US market. The result is that an investment in the Australian market has grown around 250% in 10 years. A similar investment in the US markets has grown by around 65% in ten years. The correlation discussion becomes even more complex when you adjust for currency movements between the AUD$ and US$. During this ten year period the exchange rate between the AUD$ and US$ has fluctuated between a low of US$0.485 per Australian dollar and the current exchange rate of US$0.865 per Australian dollar. This represents an 82% appreciation in the Australian dollar relative to the US dollar and results in only a 40% increase in the S&P 500 in Australian dollar terms. Clearly currency fluctuations affected correlation between the markets.
What can we say about the correlation between the Australian and Chinese market over the past five years? Well, at a very simple level the Chinese market significantly underperformed the Australian market for most of this period and then significantly outperformed the Australian market since late 2005. More importantly, what does this tell us about the likely correlation between the Australian market and the Chinese market in the future? Given our previous observations on the US market, the answer is probably very little. As unsatisfactory as this answer appears, any other answer is fraught with danger. 16. Stay vigilant The ability to monitor news and ASX announcements for changes in price-sensitive information is an important part of an online broking service. Check that the broker's offering suits your needs. 17. Take tax into account for investment planning When judging performance, investors often look at the wrong number, since many published comparisons of investment performance do not take into account tax. For example, money invested in a cash trust earning interest at 5.3 per cent a year would produce a net return of 2.73 per cent for anyone on the top marginal tax rate. Our tax system divides investment earnings into two streams. Income earnings are taxed at full marginal tax rates. But the profit on the sale of the shares or property gets concessional treatment for the gain in capital value. So the form in which investment earnings come to you makes a major difference to how much you get to keep in your pocket. 18. Tax advantages of borrowing to invest There are several tax advantages when you borrow to invest in shares:
you can prepay the interest up to 13 months ahead, prior to June 30, which is helpful for cash-flow planning and also allows you to claim the deduction a full year in advance you can defer any capital gains tax liability until the shares are sold as you're geared into the market you will own more shares than if you had paid cash, so you will receive more dividend payments. If the shares are franked then you can offset the franking credits against your assessable income 19. Understand straight-through processing When a broker offers 'straight-through processing' this means trades are fully automated - you're trading direct into the market yourself. Once you submit a buy or sell order, that's it, it can't be cancelled and the trade will be automatically executed. Manual processing sees trades go to a human being in the broker's office first before being submitted to the market.
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