Summary: There are various simple tips for Australians investing in shares that apply to everyone. By following these tips you can avoid unnecessary costs and fees, obtain special discounts, increase performance, reduce risk, save time, and be able to better capitalise on opportunities.
In this post, I will collate a list of these tips for share investing.
Details:
1. When opening an online share broker account take maximum advantage of a special promotion (typically free trades)
For example, you can save up to $1,000 on brokerage with Nabtrade by using the old coupon code 1000FREE60 when signing up.
The best time to open an online broking account is only when you've done your research and are ready to invest and take advantage of the free trades. For instance, after a market pullback or crash when you want to make a number of investments. Or if you are set on trying out short-term share trading to do so during a free brokerage period.
See:
> Nabtrade - Free brokerage (code still works after close of initial promotion)
2. Do your definite and immediate regular buy-and-sell share transactions via the cheapest, fully-featured online broker. Keep holdings in each share within the same broker
While there are marginally cheaper online brokers, the reliably-cheapest major broker with essential features (smartphone app, real-time price watchlists, etc) is Nabtrade and its owned by the reliably-cheapest bank NAB. (See: > Start using only fee-free banking)
The full details of Nabtrade pricing indicate they are overall the best value-for-money of major Australian online brokers:
> Full Nabtrade pricing information
However, the cheapest option for those making definite trades of large values (over $20,000) is SelfWealth which charges a flat $9.50 per trade regardless of trade value.
Those who regularly buy shares at market prices throughout the year, especially if often in the same stocks (ETFs, LICs, larger companies) or in low trade sizes ($2000 or less) would be best off doing so through the cheapest broker.
As a general rule, all of your transactions in an individual stock should be with the same broker. This allows you to sell your desired quantity in the same trade rather than having to make multiple trades (thus pay multiple brokerage fees), and it also allows for easier management of tax-related savings (capital gains tax holding periods, 45 day holding period for dividend franking). Sharesight is especially useful for this.
You can auto-email trades from virtually all Australian brokers to Sharesight which can then provide a single overview.
3. Make all delayed or opportunistic buy transactions using a broker that lets you place trades that can be temporarily funded by your existing holdings (e.g. CommSec)
Most online brokers - including Nabtrade and SelfWealth - only let you place trades if you have the full funds in your cash trading account. However, CommSec lets you place trades that are funded against existing holdings (~2 times the value) till settlement is due (2 business days after the trade goes through). CommSec also provides an extra $25,000 trading limit for "leading stocks" (e.g. ASX200) and a $7,500 limit for non-leading stocks. And trades that exceed your combined trading limit only need initial deposits of 50% of the excess trade value.
See:
> CommSec - What is my trading limit and how do I provide CommSec with a deposit for share trading?
As an example, if the market value of my current holdings in CommSec are $50,000 and I have $5,000 in my Commonwealth Direct Investment Account (CDIA) then my trading limit is:
> 2 x $50,000 + $5,000 + $25,000 = $130,000 for leading stocks
> 2 x $50,000 + $5,000 + $7,500 = $112,500 for non-leading stocks
If I wanted to create trade orders in non-leading stocks worth $130,000 then I'd need to deposit 50% of the difference between the order value and trade limit = 50% of $17,500 or $8,750.
So while CommSec has higher brokerage than the cheapest options like SelfWealth, this is a major advantage in being able to:
(a) Place multiple trades conditional on some criteria (e.g. the price falling below a certain number or percentage) that may sit in the market for long periods and often never get matched
(b) Take immediate action when you receive an alert of a share price fall or other share news rather than transferring funds and waiting 1-2 business days
(c) Place opportunistic conditional trades in illiquid shares that would only be matched by a forced/panic seller
This avoids having significant cash sums sitting in online broking accounts earning no interest. It also eliminates the overhead of transferring cash between the trading and savings accounts provided by each online broker (the trading account pays 0% interest).
If making a large, buy-and-hold investment in an ETF or LIC this is often the best one to do in CommSec as you don't want to have to sell and buy back.
4. Ensure your settlement account is the cheapest option. If trading without upfront funds make sure you transfer the settlement funds as soon as trades are confirmed. Make the settlement account a linked account to get around daily transfer limits
Most brokers force you to use a trade settlement account with the same broker, you can't just choose your preferred online savings account with another bank. This is the case for Nabtrade though at least it's linked High Interest account pays the top interest rate available (as of July 2017 2.15% compared to around 1% at other brokers). However, all cash settlement accounts (including Nabtrade's) pay almost no interest and few people are willing to expend the effort to continually transfer money between the cash settlement account and a linked high interest account if available. Nor can you do this if an order is sitting active in the market.
See: > Nabtrade - Cash Management
Some brokers - including CommSec - let you switch the settlement account to any bank account of your choice. The catch is that you pay a higher brokerage rate:
This may seem worthwhile for the convenience but I don't recommend it unless you calculate you aren't paying excessive brokerage costs because you make very few trades and not of amounts over $10,000.
Someone who lazily switches to using their preferred bank account for settlement irrespective of how frequently they trade or whether in amounts over $10,000 would pay:
- $60 instead of $30 on a $20,000 trade
- $155 instead of $60 on a $50,000 trade
Brokers, like CommSec, that let you place trades and transfer settlement funds later, have "late settlement" fees. CommSec has a minimum late settlement fee of $100 and this can increase if full payment is delayed beyond a day or two. CommSec may possibly waive this fee if asked on the first occurrence but it is critical to ensure you transfer funds immediately. As of March 2016, settlement is "T+2": 2 business days after the trade date. For options, short-selling or other types of trades settlement dates are usually earlier (often T+1).
Note that the fastest way to move funds into your CommSec CDIA is via direct deposit from another large Australian bank (I use UBank owned by NAB). Direct deposits initiated at the start of the day can clear on the same day.
Make sure your settlement account (e.g. CommSec CDIA) is a verified linked account with your bank account (e.g. UBank account) so that you can transfer online more than the daily limit ($20,000 with UBank). However, if necessary, you can transfer more than the daily limit by phone.
Note that CommSec also sends SMS reminders only if current funds in your CDIA settlement account are insufficient to meet that day's settlement debits. So if you get such a SMS (advising that funds must be available by 6pm) try and set up a direct deposit immediately for the required amount.
The CDIA does have some theoretical overdraw function (as it lists a 17% interest rate for negative balances) but this cannot be relied upon for settlement (though it may work for small amounts). A formal overdraft facility cannot be set up on CDIA accounts.
CommSec
> What happens if share payment is overdue?
> CommSec - Trade Settlement
> CommSec - T+2 and Offset ("contra") trades
5. Set the expiry date for trades to the maximum period (usually ~20 trading days for normal shares). Cancel old orders with no partial trade and re-create them to maximise the expiry period.
All buy or sell orders can expire at the end of the day or at the default expiry date, which is ~20 trading days for normal shares. It always makes sense to use the longest expiry period if you will be actively managing your order price limit (or other conditions) as you will pay less brokerage having to complete desired purchases or sales that only get partially matched.
A secondary aspect of this is to cancel old orders that haven't been partially matched and re-create them. The ~20 day expiry period is from the date the order was created, so if it is partially matched on day 19 then it will expire 1 day later.
This strategy is especially important if placing opportunistic orders or trying to get matched at the very top or bottom of a trading range, as you will be partially matched often, and it frees you to set and re-amend price limits at the margins without worrying about extra brokerage costs.
CommSec
> Why has my order been cancelled?
6. Choose your buy/sell price based on current market orders. Check your position in the market when cancelling and re-ordering or changing price
Virtually all of the time, I choose the price for my buy and sell orders based on the current market orders. I generally want to sit half a cent (or the minimum increment) above or below a large existing buy/sell position near to the price I am happy to accept.
On your broker's smartphone app you can use the Market Depth tab to see all current orders and choose your buy/sell price.
However, if you want to check your order's position in the market, you'll generally need to use the website. In CommSec this option is available from Manage Orders.
If following the advice in #5 above and cancelling an order just to re-create it, you may wish to check your market position as well before you do so.
7. Set up news, price, ex-dividend and other important alerts on all of your unmatched trades and holdings in individual shares. Establish a reliable way of monitoring all ASX announcements for a share as broker app alerts typically only trigger on those marked "market sensitive"
Setting up share alerts via email/app is free and umlimited on CommSec (there may be another low cost broker which offers this but I am unaware of one).
It's important to note that broker app alerts for ASX announcements are usually only for those marked "market sensitive" (i.e. will have an obvious price impact). While you might think that having alerts set up for Market Sensitive Announcements is sufficient for all price-sensitive announcements, it usually isn't. Many price-sensitive announcements aren't classified as market sensitive, such as Listed Investment Companies reporting their Monthly or Weekly NTA.
The only free Australian service I know of that will email you immediately when any ASX announcement is posted is Listcorp. It has ~20min delay though.
Personally:
- I use Listcorp so I can be emailed all announcements for stocks I have current orders active for or wish to trade immediately
- I use CommSec for market sensitive announcements for stocks I hold
- I use CommSec for price and sometimes volume alerts on stocks I have current orders active for or wish to trade immediately
- I use CommSec to set up 1 day ex-dividend alerts for all stocks I hold or am actively looking to buy (to avoid accidentally paying more for a stock that switches to trading ex-dividend)
Once you exhaust your initial alert credits, Nabtrade charges $11 for 100 credits. Consequently, I use CommSec for all simple alerts (ASX announcements, price changes, volume changes, Ex-dividend dates).
If you need more sophisticated alerts then Nabtrade provides more functionailty (e.g. technical parameters, research ratings) but you'll need to buy alert credits.
See:
> CommSec - Alerts
> Nabtrade - Tools
> ASX - Today's announcements
> ASX - Search for company announcements
8. Make sure your shares are held as CHESS sponsored not Issuer. Set up automatic dividend direction to your broker account. Ensure your broker has your Tax File Number. Minimise paperwork and fees by automating as much as possible through your broker and via online methods (email)
The advantages of using CHESS sponsorship with your online broker are:
- You can place a buy order without a deposit if you have sufficient CHESS holdings already sponsored by CommSec
- You only have to notify your sponsoring broker if you need to change any personal details
The advantages of setting up automatic dividend direction with your broker account:
- You will save a huge amount of paperwork or online share administration having to provide your bank details each time. Also, if you forget or lose track, you won't miss out on dividend payments.
If your broker doesn't have your Tax File Number you may be subject to withholding tax. If your broker does have your TFN make sure that this means you don't need to provide it yourself to the company each time you buy new shares.
After you settle any share purchase you will receive postal letters asking for various details to be supplied by paper forms or via online investor portals. If you are CHESS sponsored and have set up automatic dividend direction the only two requirements may be:
- Providing your TFN to the share issuer (if your broker doesn't do this)
- Providing your desired method of contact such as an email address
- Foreign Account Tax Compliance Act (FATCA) status (whether you are an Australian or foreigner for tax residency purposes)
All brokers provide trade confirmations and order acknowledgement notifications. There are fees for receiving these via paper (e.g. CommSec charges $1.95 for each one). In your Broker Account Details you can ensure you've selected the options to receive all communication via email.
See: CommSec - Account Details
CommSec
> What is CHESS?
> How do I become CHESS sponsored?
9. Make your share registry administration as simple as possible
After you buy shares you'll need to supply certain information to the relevant share registry (e.g. Link, BoardRoom, etc).
Key tips include:
- Ensuring you setup via your broker your share holdings as CHESS sponsored with automatic dividend direction (and TFN supplied)
- Keeping track of your "Reference Number" (HIN/SRN): Your full Reference Number starts with an 'I' if you are Issuer Sponsored (SRN) or 'X' if you are CHESS sponsored by a broker (HIN). It can be found in your broker account or on the Trade confirmation PDF. E.g. 5134xxxx. If needed when entering into a registry add an X or I prefix but usually the nmber alone is what is needed.
- Within each share registry website, select the "update all" option where possible and update your TFN, FATCA, and communication preferences to email.
See:
> CommSec - How can I obtain my Holder Identification Number (HIN)?
> Investtogain - Share registries
10. Ensure share transfer is seamless by keeping your Name and Address identical across all brokers and share applications
Brokers and application forms will collect your Name and Address via simple forms but changing these once you have a CHESS (HIN) or Issuer-sponsored (SRN) share holding requires certified documents, lots of paperwork, and has plenty of pitfalls and delays.
Just remember to always use the exact same Name and Address when opening any broker account or completing any share application.
For share applications you want to consolidate under a single HIN you can quote the HIN but often the Name and Address must also match or they will pointlessly issue you a separate SRN holding instead.
See:
> How do I update the details on my Issuer Sponsored shares?
> How do I transfer issuer sponsored shares over to CHESS with CommSec?
> How do I sell my Issuer Sponsored Shares?
> How do I transfer shares held with another broker to CommSec?
> How do I transfer shares held by another party to CommSec? (OMT)
> CommSec Self Service
11. Understand how Dividend Reinvestment Plans (DRPs) and Share Purchase Plans (SPPs) work and the pros and cons
Pros:
- Slight discounts to the current share price are sometimes offered (not always though! - see below)
- Save on brokerage if buying parcels regularly
- A way to automate reinvestment
Cons:
- In some cases (e.g. some LICs) the DRP price is based on the NTA not current share price, but most LICs trade at discounts to NTA and often they are steep discounts. E.g. CBC issues DRPs at a 2% discount to its monthly NTA but trades at ~12% discount to NTA. For its Nov 2017 DRP this resulted in a DRP price of 0.9786 but the share price was trading between 0.88 and 0.92.
- Will end up with lots of small parcels with different cost bases which is a nightmare for capital gains tax calculations if doing it yourself. It can be simple if using Sharesight and it covers DRP or SPP for that share.
- In illiquid shares or volatile markets the DRP or SPP calculated price (an average of 5-10 trading days) may be higher than what you could achieve yourself
- Discounts can be removed at any time so if using a DRP on that basis would need to monitor
- Unless using a portfolio tool like Sharesight that can track dividends automatically you may find it harder to track your share performance if using DRPs
See:
> Beware the hidden costs of DRPs
12. Install your online brokers smartphone app and the best other share investing apps
See below.
See:
> CommSec smartphone apps
> Nabtrade Android app
> Stocklight Android app
> Canstar Blue - Apps for Australian share traders
13. Use a Sharesight free or paid subscription to track your portfolio and manage all tax and admin requirements
Sharesight is by far the best share portfolio management tool available.
The free account is fine if you can live with just 1 portfolio. It also has a soft limit of 10 holdings -you can actually add more but some reports (e.g. tax reports) don't factor the holdings above the limit of 10.
For those with more than 10 holdings or who would benefit from tracking multiple portfolios, the $25/month plan is very worthwhile.
Even if just using the free Sharesight account you can do very useful things like:
- Auto-update your Sharesight holdings via having broker confirmation emails also sent to a special mailbox (e.g. myhold355xxx@trades.sharesight.com)
- Use reports like Sold Securities, Taxable Income and Capital Gains Tax. The Capital Gains Tax report will even let you try modifying CGT decisions (e.g. default of "first-in, first-out") to figure out how to optimise tax decisions (like miminising tax).
See:
> Sharesight Blog
> Investors need to break these 3 bad habits once and for all
14. Properly understand and take advantage of dividend franking, the 45 day rule for claiming franking credits and the 12 month holding period for claiming a discount on Capital Gains tax (usually 50%). Also how your tax rate matters (e.g. CGT doesn't matter to retirees with investments in superannuation)
How dividend imputation and franking works
Dividend Franking
- Whether franking credits can be offset against an individual’s net tax payable revolve around what is commonly known as, the 45 or 90 day rule. The 45 day rule applies to ordinary shares and the 90 day rule applies to preference shares.
- The 45 day holding period only applies where an individual’s total franking credit entitlements for the financial year are above $5,000.
- The buy and sell days are excluded so the effective minimum holding period is 47 days.
- If a shareholder purchases substantially identical shares over a period, the holding period rule applies a ‘last in first out’ method to establish which shares satisfy the holding period rule.
- If you have realised capital gains from share trading or sales and are in a high tax bracket then it may be worthwhile to trade off some capital losses for dividend income and franking credits. Conversely, if you have capital losses for the financial year you may wish to sell some shares before they go ex-dividend.
- Note that "dividend stripping" as a systematic tax avoidance strategy is under scrutiny by the ATO, so it should not be the major purpose of your share investing. And "dividend washing" - claiming two sets of franking credits by trading the special market - is definitely not allowable under tax law.
Capital Gains Tax
- The Discount method of working out CGT is the default. You can use the indexation method (CPI discounts) only for assets acquired before 21 Sept 1999.
- The basic rule is that you must have owned the asset for at least 12 months to claim the CGT discount.
- The discount percentage is the percentage by which you reduce your capital gain. You can reduce the capital gain only after you have applied all the capital losses for the income year and any unapplied net capital losses from earlier years. The discount percentage is 50% for individuals and trusts, and 33.33% for complying super funds and eligible life insurance companies.
- If not using an accurate CGT calculator like Sharesight then make sure you don't claim the CGT discount before having exhausted all capital losses (current year and carried from prior years).
Tax Loss Harvesting
- You can sell losing positions to offset capital gains, both short term and long term. Ideally, you offset shot term gains that don't have a 50% tax discount. The Sharesight Unrealised CGT report is very useful for doing this well in advance of the end of the financial year or before major losing positions hit their 12 month holding and move to long term.
- Note the "wash" rules, regarding rebuying the same stock. But you can legally rebuy similar exposure.
See:
> You might not be entitled to claim a franking tax offset
> ATO - The discount method of calculating your capital gain
> Marcus Today - Dividend stripping
> Does Dividend Stripping Work?
> Cuffelinks - Four things retirees must know about shares
> Offset your capital gains by tax loss selling before EOFY
15. Understand how Conditional Orders work, the risks of low liquidity if using them, and how to capitalise on this when others use them
Most Australian brokers offer conditional orders which allow you to set specific conditions to buy or sell shares at a certain price if a share reaches that price in the market. In theory these are useful as they allow you to buy or sell based on rules like percentage price drops from the current price.
Conditional orders can occasionally be useful in highly liquid shares but are terrible in illiquid shares.
In the example below, NCC dropped 5% below its prior close (to $1.30 at 3:12pm from $1.37) and this triggered a Trailing Sell conditional order to sell the person's holdings of 7970 shares at the market price. Unfortunately, there were hardly any buy orders below $1.30 and this order was filled down to $1.23.
Minutes later buyers reacted to the 10% price fall and the close price ended back at $1.30. Opportunistic buyers may consider whether some sharp price drops in low liquidity stocks are due to such conditional orders and be the first to respond by buying.
If you have sufficient portfolio value to allow for multiple opportunistic buy orders well below market price, you can respond to a sharply falling price in illiquid stocks like NCC's by placing buy orders well below the current price, hoping for conditional percentage-based drop orders be triggered.
16. Accurately track and benchmark your performance on an annual aggregate basis and for individual trades
As opposed to passive, long-term buy and hold investing, trading shares or making lots of active decisions is usually not worthwhile for most people. They simply lack the skills, time, knowledge or opportunity to meaningfully beat passive returns (while taking the same or lower risk).
The only way to determine if you have found a niche and developed the skills to exploit it is to track your performance and benchmark it. Tracking the performance of individual shares is also worthwhile in trying to figure out where your best advantages lie versus your biggest weaknesses.
Personally, I've found that Sharesight provides the most accurate and useful performance information on a single share basis: I can see how much I've made or lost over my desired timeframe irrespective of the number of trades and inclusive of brokerage.
However, it's overall aggregate number is lacking because it incorporates many extremely short-term trades I back out of at minimal gain or loss.
I find a more useful measure to be Sharesight's Annual FY Performance (capital gain plus dividends) / FY Average Portfolio Value (this is not available)
For FY 2017-18 Sharesight reports my performance as ~15%. According to my above calculation my performance is ~27%.
The S&P/ASX 200 Index benchmark (STW) total return is around 12%.
Further Info:
The SMSF Review
> Online Brokers
HotCopper
InvestSmart
The Age/SMH
> When big boys go ex-dividend, cum dividends cum out to play
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