How to choose a brokerage to buy ASX shares

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Welcome to the Motley Fool’s How to choose a brokerage to buy ASX shares.

Investment education

For those who are looking for some investing 101, you’ve come to the right place. The first article we recommend to read is our Beginner’s guide to investing in ASX shares. Then come back to this article, which explains how to choose a brokerage service so you can get started buying shares. 

Select your brokerage service to buy and sell shares

If you want to invest in shares, you can use a full-service broker or an online broking service. Let’s look at how they differ below.

Online broking service

With an online broking service, you can open an online trading account and be completely in charge of your own investment decisions. Because you make share purchases yourself, the fees are relatively low. You’ll have to pay a fee each time you make a transaction, and those fees typically start at about $15 (although some can be as low as $5). 

When choosing an online broker, you’ll want to consider how much you’ll be paying in transaction fees. Brokers might also charge other fees. Common ones include a foreign exchange fee, a subscription fee, and an inactivity fee.

You’ll also want to see what the brokerage will let you trade. Some platforms only let you trade shares that are in the S&P/ASX 200 Index (ASX: XJO). Other platforms will let you trade on exchanges that operate all around the world.

Some online broking platforms are more tailored to casual traders, while others are more focused on servicing experienced and active traders. Generally, if you’re just starting out, a platform designed for casual traders is all you’ll need.

You’ll also want to pick a platform that has reliable customer service. Ideally, their customer service team will be based locally in Australia. 

Full-service brokers

With a full-service broker, the broker does the trading for you. He or she can also advise on what to sell or buy. A broker needs to have a reasonable basis for why they’re recommending a particular company  to you, and they must tell you if they have any interest in that company themselves.

The fees in these cases are a percentage of the trade value. Usually, you’ll pay a lower percentage for larger transactions. 

For example, you may have a 2.5% fee on a transaction of up to $5,000. For a larger transaction, it may be just 0.1%. Because of this, small trades can end up becoming quite expensive.

It’s also worth noting that most brokers will charge you a minimum fee.

Despite these costs, many people are happy to pay these higher transaction fees for the peace of mind of knowing they’re receiving help from a professional. Others, however, enjoy the independence of being in charge of their own investments.

Which brokerage should I use?

It’s important to do some comparison shopping when it comes to brokers, as there are significant differences.

Some brokerage services offer tonnes of educational features, as well as access to high-value research reports. Some even offer branch offices across the country, which can be great if you ever want face-to-face assistance. Others are light on features but charge some of the cheapest commissions in the industry.

Once you’ve decided which broker best fits your needs, opening a brokerage account is typically a quick and painless process.

There are a number of brokerages available to Australian investors. Two of the most popular online brokerages are Commsec (managed by the Commonwealth Bank of Australia (ASX: CBA) and Selfwealth Ltd (ASX: SWF)

Wherever you are in your investment journey, it is important to choose a brokerage that suits your needs, investment goals, and educational requirements. Before comparing individual brokerages, take some time to consider what is important to you in a brokerage service. This will depend on where you are on your investment journey. 

If you are just starting out, you may prefer a brokerage that offers easy to understand educational resources, access to support, and potentially the ability to practise trading before you start investing real money. 

When you have more experience, a platform that offers higher level educational resources, insights from professional investors, and in-depth data may better suit your needs. As your level of experience grows further, you may seek a brokerage that offers the ability to trade not just shares, but also options, fixed income products, and commodities. 

Your choice of brokerage will also depend on your investment goals. Are you a long-term investor who will trade only occasionally? Or do you intend to trade frequently? Do you prefer to take a hands-on approach, or do you want to hold your investments over extended periods without frequent monitoring? You should also consider whether you want a brokerage that will assist you in identifying investment opportunities, one that makes it simple to execute trades, or a service that offers professional advice. 

Take the time to honestly assess your needs and how much time and energy you have to devote to your investments. These factors may change over time, but the place to start is by considering your current requirements, rather than trying to anticipate your future needs. Once you understand these, you will be in a much better position to understand which  brokerage service will meet your requirements best.

Brokerage fees also need to be considered. Depending on your investment style, however, these may be less important than other factors. If you intend to buy and hold, trading only infrequently, brokerage fees will be less of a concern as they will only be incurred occasionally. For day traders, however, broking fees may be a more important consideration as they will add up much faster.   

Sign up for an account

After selecting the platform you want to use, it’s time to register for an account. Usually, this step is free to complete. However, some platforms might charge you a subscription fee or other ongoing fees. 

You can register online and will have to provide:

  • Your name, address, date of birth, and contact details
  • Your tax file number (TFN)
  • Linked bank account details
  • Proof of ID.

You will then likely have to deposit a certain minimum amount of money in order to open your account. After your application has been processed and approved, it’s finally time for you to start trading.

SMSFs vs standard accounts

When you open your brokerage account, you’ll have to decide what type of account you want. You have a few options, but for first-time investors, there are generally two main ways to go – standard or SMSF.

A standard brokerage account (under your name or joint with your partner) is your basic, everyday investment account. Generally, any profits you make are subject to capital gains tax (CGT), while losses can be used to offset your future CGT liability. On the other hand, dividends are taxed as income, just like your wages.

Another option is to start a self-managed super fund (SMSF) and open a brokerage account under this structure. We won’t go into detail about whether an SMSF is right for you, as the best person to give you that advice is your accountant.

But if you do buy and sell shares under an SMSF, the income you generate is usually taxed at a concessional rate of 15% – and that’s usually well below the rate you’ll pay on earnings received through standard accounts.

The advantage of a standard account is that you can deposit as much money as you want and withdraw your funds whenever you need to.

You should also be aware that there are costs involved in setting up an SMSF and maintaining it, so you should talk to your accountant about what these are before deciding.

Options for the self-employed

There are several perks of working for yourself, but unfortunately, superannuation isn’t one of them, as many sole traders and small business owners are not compelled by the tax system to contribute to their retirement savings.

This often means they won’t have enough to retire on unless they force themselves to put money aside every month for their super. If an SMSF isn’t an ideal option for you, then signing up for a super account run by an industry fund or a private financial organisation is probably the way to go. 

However, you will need to do your homework as fees and investment returns can vary greatly between funds. You can compare the performance of the most basic super funds available in Australia (called MySuper funds) through the YourSuper comparison tool. Some funds give you greater control over how your superannuation savings are invested, and some allow you to invest your super savings directly in the share market.

No matter what you decide, you have to make it a habit to deposit part of your income into your super account – even if it means cutting back on your pub crawls or cafe lunches.

Pick the shares you want to purchase

Perhaps the most anxiety-inducing part of trading is actually figuring out which shares to buy. Use the market research tools that your brokerage provides to find the best shares for your investment goals. 

Decide if you want shares that bring you value or growth. Many times, when it comes to trading shares, higher risks are associated with higher rewards. Those who are more risk-averse will want to pick shares of value over growth.

You’ll also have to think about how many shares of a company you want to buy. This is going to come down to your investment goals and your budget.

It’s important to remember that, unless you already own shares in a company, the minimum order size via the ASX is $500. So, if you find a company that’s worth $10 per share, you’re going to have to purchase at least 50 shares. 

Place your order

Many novice investors tend to get tripped up when it comes to share order types. There are two primary options you need to know about when purchasing shares. You can either buy shares ‘at limit’ or ‘at market.’

A limit order is when you set a maximum purchase price for your buy order. If the shares you want to buy reach that price, then your trade is automatically executed. This is ideal for people who want to buy shares of a company when the share price comes down, but they don’t want to have to stare at their computer screens all day.

When you want to buy shares immediately, at their current market price, then you’ll want to place a market order.

Depending on the platform you use, you might also be able to use a variety of conditional orders. After you’ve entered all the specifics of your trade, you’ll get to review those details before finally placing the purchase order. 

Once your order is processed, you will receive a contract note with all the details of the trade, including the company purchased, the share price it was purchased at, and the brokerage fee. You will usually receive these contract notes via email. 

Pay for the trade

In order to cover the cost of the trade, you’ll need to have enough funds in your online share trading account. This includes having enough to cover the brokerage fees. 

The trade settlement period on the ASX is 2 business days. This is commonly referred to as T+2. 

Monitor the performance of your shares

After you’ve purchased your shares, you’re going to want to monitor their performance. If you have a long-term investing strategy, then you won’t need to monitor them daily. Checking in on your share performance once or twice a month should be enough.

If you have a medium-term or short-term strategy, then you might want to check on your shares weekly or daily.

You can review the performance of your shares by logging into your trading account. Many platforms also offer mobile apps that you can review and trade from. 

Sell your shares (when you’re ready)

Whether you’re trying to raise some cash or simply keen to collect some profits, there’s going to come a point where you’ll want to sell your shares. Hopefully, at a higher price than what you bought them for! 

The process of selling your shares is very similar to purchasing. You can choose a limit order or a market order. With a limit order, you can set a minimum sale price. With a market order, you’ll be selling the shares at the current market price. 

What Motley Fool can do for you

Investing in shares can be an exciting and fruitful long-term process. If you’d like to have some professional help, see how we can get you started on the right path today!

Figures correct as at 12 January 2022. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.