Punters flock to online trading

It's quick and easy and encourages people to buy shares, but many investors are throwing caution to the wind in clicking the mouse. By PHILIP MACALISTER*

The rapid growth in the number of online sharebroking services in New Zealand is great for getting people to buy shares, but there are questions about whether they encourage sensible investment decision-making.

What is 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), and it helps them to do more than just think about saving.

Another plus is that it increases the proportion of the market owned by locals.

Oversea investors own most 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 is 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 cannot provide figures, and its member firms that offer internet broking also provide traditional services such as taking phone orders.

What is clear is that online broking is becoming a fiercely competitive area. Already, ASB Bank and Bank of New Zealand offer online trading while sharebrokers such as Direct, Access and DF Mainland offer services, and these are available through other websites such as Unity Direct and Sharechat.

Online trading is popular for two reasons: price and access.

Trades, no matter what size, can be transacted for between $25 and $30, rather than charged on a commission basis.

It has removed the need to actually talk to a broker. This, as explained later, is good and bad.

The big risk with online trading is that it turns people from investors into gamblers.

This was made clear by US Securities and Exchange Commission chairman Arthur Levitt, who said: "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 share buying 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 the research.

The top of the pyramid is the execution of the buying decision.

Online broking is promoted on its low price, yet in the overall equation it is not the big issue people need to be concerned with.

Mr Levitt is also concerned about the number of people 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 said.

"No one should have any illusions of what they are 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."

People are holding shares for a much shorter period than before.

A London Financial Times report said that the average holding period for equities in the US had 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 risk 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 five or eight 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."

Second, he said, overseas experience showed that online sharebroking seemed to appeal most to individuals who traded oftenin 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 firms tend to offer investors high income through dividend yields rather than growth through share price appreciation.

"Each of these markets [Australia, US and Britain] 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 said.

"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."

He said this was normally done through unlisted unit trusts.

The exception is the Australian market, which is increasingly being considered part of the "local" market by New Zealand investors.

Mr Cobb said that while it is possible for New Zealanders to invest in overseas markets through the internet, other than Australia, there wre additional risks.

JB Were's experience of many overseas brokers was that they had delivered poor execution of trades.

"If there is anything slightly out of order you can't get any service," he said.

An added frustration in the US market is that the online broking systems cannot keep up with all the stock splits and name changes which go on among listed firms.

The other problem is that New Zealanders are asleep while the big overeas markets are open. They have to put their order in before they go to bed and hope the markets do not suffer a correction.

Mr Sheather said another problem was the inference that by providing customers with online research and immediate access to company news, traders are somehow empowered with the ability to trade profitably.

"However appealing this scenario is, making money on the stock market 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.

"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."

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 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.

* Philip Macalister is the editor of online money management magazine Good Returns. It provides news and information on managed funds, mortgages, superannuation and financial planning.

Wilson and Horton, publisher of the New Zealand Herald, operates the online trading site StockWatch.