Convenience, timeliness and low commission rates have made e-trading increasingly popular
A volatile stock market presents boundless opportunities but the speed a transaction is executed becomes much more important. When it comes to speed, those buying and selling shares through an online share-trading platform, referred to as e-trading, have an advantage over those who place their orders by calling their dealers or remisiers.
“In a volatile market where share prices move up and down very quickly, you will find it easier to access the stock market online, as opposed to calling your dealers. At times, phone lines can be busy,” says a spokesperson from CIMB Securities. “Besides the convenience and flexibility of placing an order at any time, even outside market hours, e-trading allows you to key in the buy or sell orders, make amendments or cancellations to undone transactions, and specify expiry dates on orders [known as good-till-date orders, which allows user to specify the number of days an order is valid].”
Online trading is also popular because of the low fees levied on transactions. On average, online platform providers charge a commission rate of 0.10% on the value of each contract, while for remisier or dealer transactions, the rate is 0.60% per contract. “Low fees translate into cost savings. And this can lead to higher profits,” says Tan Chee Siong, executive director of Jupiter Securities Sdn Bhd.
The actual amount charged differs among brokerages offering e-trading facilities but the cheapest provider may not always be the best choice. Here are factors to consider when picking an online stock-trading platform.
1) Cost and the required deposit
Most brokers do not charge a fee for the opening of an online share-trading account. “However, whenever you sign up for an online account, you are required to open a Central Depository System (CDS) account with the Bursa Central Depository, irrespective of whether you already have broking accounts with different broking houses,” says Tan. “Bursa Malaysia charges RM10 to open a CDS account but an increasing number of online broking houses are absorbing this fee.” Broking houses that are currently paying for this fee are ECM Libra Investment Bank, Jupiter Securities and Hong Leong Investment Bank (refer to table on next page).
Other costs that vary between trading accounts and brokers are dividend-handling fees and share-custodian fees, which apply to nominee stock-trading accounts.
Before executing trades, some brokers will require cash upfront while others will ask for a minimum deposit. Online share-trading platforms that require cash upfront usually do not permit trades that exceed the amount placed. For example; an upfront cash placement of RM10,000 in your online trading account allows you to trade up to RM10,000.
Asking for cash upfront before stocks are bought lowers the risk exposure of the broking house. This allows them to lower their brokerage rates, say Tan. Unutilised cash usually earns interest at a rate similar or slightly lower than fixed deposits.
According to CIMB Securities, some e-trading portals require a minimum deposit but this allows you to engage in margin trading. For example, a minimum deposit of RM1,000 allows you to acquire up to RM3,000 worth of shares. Some companies may allow the placement of share certificates as collateral but the amount of leverage received is lower. These facilities are better suited for investors with higher risk appetite and interested in margin trading.
Unfortunately, it can be costly for investors to trade in foreign shares even if they use the e-trading facilities of a local broker “Unless the foreign stock exchange does not charge contract stamp, investors who invest in foreign shares via a local broker are required to pay two contract stamps: one to the respective foreign exchange and the other to Bursa Malaysia. However, if you are transacting in a foreign exchange by opening a trading account with stockbrokers based in that country, you only need to pay for one contract stamp,” says Tan, adding that Bursa Malaysia allows local stockbrokers that offer online cross-border trading to charge the local prescribed brokerage rate or the foreign brokerage rate, whichever is higher.
2) Direct account vs nominee account
Online stock-broking platforms offer two types of trading accounts: direct and nominee. A nominee account appoints the stockbroker to hold the shares on behalf of the client. “Under a nominee account, the broking house would basically manage and inform you about corporate developments [on shares you are invested in] such as rights and bonus issues,” explains Tan. The major disadvantage of a nominee account is that you are not eligible to apply for initial public offerings (IPOs). A direct trading account offers this option. Those who prefer a direct account should check with the brokers on whether they offer this option.
3) Service and support
An online stock-trading platform should serve and answer their clients' enquiries. Training, support and talks are among the services offered. Its staff should be able to explain and educate clients about functions and benefits provided by the trading system. “One may choose a platform that comes with a lot of features, but you may not be able to make full use of it if there is lack of support,” says Tan. Check whether the stockbroker provides a help desk as this is your resource for technical queries and how-to questions. “Ask whether the broking house provides workshops or one-to-one training sessions. It is also important to ensure that they provide online or phone support or both to answer your queries,” says Katherine Yee, head of HLeBroking, Hong Leong Investment Bank Bhd.
4) Features and functionalities
The beauty of an e-trading platform is the amount of information that one can access. “E-trading allows investors to view online real-time share prices, manage their portfolio and use the Internet to settle trades. They also enjoy stock-specific information such as market depth, intra-day price movements, technical indicators and historical prices. This enables you to make more effective and intelligent decisions in your trading strategies,” says the CIMB Securities spokesperson.
Look for value-added, competitive features and functionalities. Research reports are also useful while traders should opt for systems that provide advanced charting tools. Stockbrokers may charge a fee for investors to view certain information on their e-trading system. “Some brokers charge a monthly subscription fee while others will waive the fee if you hit a certain trading amount. Others will offer all their content free. It is best to check with them before you decide to open an account,” says Tan.
“What you do not realise is that providers of electronic platforms that offer free services will often only offer tools with basic functionalities. This is similar to Apple's iPad and iPhone, where the free applications only offer basic features while the fee-based ones have more in-depth and sophisticated features. Paid features and functionalities include advanced charting tools, mobile trading, research reports, SMS stock alerts and real-time price feed for cross-border exchanges,” says the CIMB Securities spokesperson.
An investor should not miss a trade because of an unreliable system. An ideal trading platform provides low-latency trade execution. “If the system's speed is slow, your order might be queuing at the back and you might not get to transact at the price that you want. This will put you at a disadvantage, especially in a hot market,” says Yee, adding that an efficient platform would require minimum effort from the user who wants to initiate a trade.
However, the speed of a trading system is not identifiable until an account is opened and orders are placed. “Before opening an account, you can check what users are saying about the speed of the e-trading system (word of mouth) or from reviews by users posted on online forums and blogs,” suggests Tan.
Online share trading requires clients to deposit monies (within the settlement period of “trade date” plus three business days) into a trust account to pay for a trade. Likewise, proceeds from a sale will be deposited into the same account. Although it is possible to execute an interbank transfer, RM2 will be charged for each transfer between different banks and a limit is imposed on how much can be transferred in each transaction. Each interbank transaction also takes a few business days before the money is transferred. For convenience and cost-effectiveness, consider using e-trading systems that allow you to conduct online banking transactions with your preferred banks. It is also important to take note of any procedure that is required to update your trust account once you have transferred money. For example, you may need to provide the stockbroker with details of the banking transaction.?