Online Investing on the Australian Sharemarket: How to Research, Trade and Invest in Shares and Securities Online

By Roger Kinsky

The complete guide to trading and researching the Australian sharemarket online, fully revised and updated 

It has never been easier to use the internet to trade and invest in the Australian sharemarket. Thanks to the wide availability of online brokers and financial websites, online market data, low cost broadband and trading sites and user-friendly digital platforms, a growing number of Australians are taking more direct control of their investments and wealth management. Online Investing on the Australian Sharemarket is a comprehensive guide to researching and trading shares and other securities online in Australia. This popular book offers step-by-step guidance on choosing an online broker, accessing and making best use of online share investing resources, planning trades, identifying profit-making opportunities, timing of and placing online orders, managing investment risks, and much more. 

Bestselling author and successful trader Roger Kinsky provides a step-by-step process for harnessing the power of the internet to make informed and profitable trading and investment decisions. Now in its fifth edition, this time-proven resource features extensively revised content and up to date information throughout. Featuring real-world advice and practical tips drawn from the author’s decades of online share investing experience, this valuable guide will: 

• explain the basic concepts, terminology, and advantages of online investing and share trading 
• explore how to avoid the potential pitfalls and common mistakes that might otherwise occur   
• examine the different types of financial websites, data, information, tools, and other resources available online 
• provide guidance on fundamental and technical analysis, online charting and indices, and strategic risk management

Offering authoritative information and proven trading strategies, Online Investing on the Australian Sharemarket, Fifth Edition is essential reading both for those new to the market and more experienced investors alike. 
 

• Language: English
• Publisher: Wiley
• Release date: Feb 22, 2021
• ISBN: 9780730385097

Book preview

Roger Kinsky

ONLINE INVESTING on the Australian Sharemarket

HOW TO RESEARCH, TRADE AND INVEST IN SHARES AND SECURITIES ONLINE

FIFTH EDITION

Wiley Logo

First published in 2021 by John Wiley & Sons Australia, Ltd

42 McDougall St, Milton Qld 4064

Office also in Melbourne

© John Wiley & Sons Australia, Ltd 2021

The moral rights of the author have been asserted

ISBN: 978-0-730-38508-0

All rights reserved. Except as permitted under the Australian Copyright Act 1968 (for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher at the address above.

Cover design by Wiley

Disclaimer

The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this publication.

Acknowledgements

I would like to thank all the companies that gave me permission to reproduce pages and charts from their websites in this book. In particular, I would like to thank CommSec, as a great deal of material was reproduced from their site, which remains the most popular such site in Australia. Many of my charts (especially in chapter 9) are drawn from the Incredible Charts site, and I would also like to thank them.

Introduction

Share trading and investing are ideally suited to the online world. Share trading can be defined simply as buying or selling shares, whereas share investing is about longer-term share ownership and management. Naturally, in order to become a share investor you must first be a share trader by purchasing shares, but from that point on share trading and investing are essentially different activities. Share traders aim to make profits from short-term trading by selling shares at a better price than they paid for them, whereas share investors aim to grow their wealth over the longer term in order to create a nest egg for the future.

Traditionally, share investing and trading were carried out by offline brokers and advisers who arranged the trades and provided the information their customers needed. Nowadays this information is readily obtained on the web, and share trading can be carried out quickly, conveniently and cheaply online. Some investors still prefer to use a broker, and it is not my purpose to denigrate the offline method, but many investors and traders have moved online entirely. The reasons for this aren't hard to discover. Online trading and investing is cheap and fast, and a huge amount of information and resources is readily available, much of it at no cost. I am constantly amazed at the amount of free information and facilities that are only a keystroke or two away. For example, there are some excellent charting sites offering a wide variety of resources that you can access free of charge. In fact, in many cases the free facilities available on the internet are superior to those you might otherwise pay for.

This leads to what I call the ‘Kinsky Principle': Never pay for any share information or facilities unless you are certain you can't access them online for free.

That said, if you decide to invest online you are basically on your own and need to make your own decisions without guidance from your broker. To do this effectively you need a certain level of knowledge and expertise, which is where this book comes in. It provides all the information you need to make sound investing and trading decisions. Reading and absorbing the information in its entirety will help you to develop and increase your expertise in share trading and investing. If you follow the many tips and suggestions contained in the book you should avoid disasters and tip the balance of probabilities in your favour.

This is the fifth edition of this book, which has been thoroughly updated to keep abreast of changes and developments since the last edition. As the title suggests, the book's primary focus is on investing, rather than trading in order to make a fast dollar in a short time period. Also, I concentrate on Australian shares and don't delve in any great depth into overseas investing or trading in some of the more exotic instruments such as currency (forex), options, futures or CFDs.

I've aimed to make the book completely up to date and error free, and my publisher has done a fine job of assisting me in this endeavour. In the real world, however, perfection is very difficult to achieve, so if you spot any apparent discrepancies, if you have suggestions for improvement or if you'd simply like to offer feedback, please email me at [e-mail]. I'll be very happy to hear from you and promise to respond promptly.

Finally, I wish you every success as an online investor and trust that this book will prove valuable in helping you to achieve your investment goals.

Roger Kinsky

Woollamia NSW

November 2020

Chapter 1

Share investing online

In this chapter I explain some basic concepts and terminology associated with online share investing. I also outline why it's a good option to trade shares online, some potential pitfalls and how to avoid them. I'll start from the beginning, so if you have some knowledge and experience with shares and investing you may choose to skim quickly through this chapter.

Using the internet for share investing

Online investing is one example of how the internet has revolutionised business dealings. Now that almost all securities exchanges throughout the world are web based, the physical trading floor has been superseded. Online shopping, banking and information sourcing have skyrocketed over the past few years, while more and more investors are trading online rather than in the traditional way by calling their stockbroker.

Control

Increasingly, Australians want direct control over their shares and other financial investments. To put it bluntly, many have become disillusioned and are no longer prepared to entrust their investments to fund managers and investment advisers who charge an appreciable fee for advice that doesn't necessarily result in the promised returns. Even if a manager or adviser is able to achieve results that are better than or as good as a market index, the fees can soak up the additional benefit, with the investor no better off.

I don't mean to impugn fund managers and investment advisers, who no doubt provide a worthwhile service for many investors. I'm simply making the point that a growing number of investors want to take a more direct and informed role in their financial destiny, and the internet is the ideal vehicle for doing so.

As investors have embraced a more informed role in their financial investments, they have increasingly drawn on the web-based resources available for share investors. This trend, in turn, has been stimulated by the increasing competition among online investment service providers who are constantly looking for ways to increase their market share. They tend to use a two-pronged approach:

reducing fees and charges

increasing the accessibility and depth of information and services provided to subscribers and customers.

It's now possible to trade online for a cost of only 0.1% of the trade value, with a minimum charge of $10 or so. This makes online investing feasible even for small investors and provides the opportunity for worthwhile trading profits to be made with relatively small market moves.

Tip

Increasing competition and use of the internet is good news for the online investor, and you can expect continuing benefits in the future if you choose the online option.

Investing

Investing implies the following two conditions:

You have some available cash (capital) over and above your day-to-day living expenses. Perhaps you've saved this spare cash from your income, or you may have inherited some money, received a tax refund or had a financial windfall. Or you may have derived your investing funds from an investment loan, which for the purpose of investing in shares is known as a margin loan.

You put this cash into a financial venture with the aim of obtaining a profitable return. That's to say, you want to put the money to good use and grow your wealth, to ‘put your money to work’ as opposed to ‘allowing your money to take a holiday’.

Investment instrument

Investment instrument is a general term that applies to any asset or commodity that can be used for the purpose of investing. In this book I'll concentrate on shares, but they are just one type of investment instrument. There are many others, including bonds, managed funds, hybrids, derivatives (such as CFDs, forex, options, warrants) and fixed-interest securities such as debentures.

Tip

If you're not an experienced investor, I suggest you avoid the more sophisticated instruments and stick to plain-vanilla shares.

Capital

Capital is a business term that means wealth. It can be money that's directly available (such as cash in the bank) or the monetary value of any assets owned by a business. The only difference between cash and capital is that capital isn't necessarily in the form of directly available cash.

Tip

While a business may have a certain amount of capital (as shown in the books of account), a great deal of this may be tied up in stock or assets that don't necessarily have the same cash value if the business tries to sell them.

Stocks, shares and portfolio

One way a company (or corporation) can raise capital for start-up or growth is by ‘going public’; that is, by becoming a public company. This capital is obtained by issuing a number of shares at a certain price. The capital so obtained is known as equity capital because the capital is obtained from investors who have equity (or ownership) in the business.

Shares are units of ownership in a company, so when you invest in shares you effectively become a part-owner of the company, and this gives you the right to participate in the company's management. You have voting rights and can vote at any company meetings that are open to shareholders. Shares are also known as equities, because shareholders have an ownership position, or equity, in the company and a claim to a share of the company's assets and profits.

The total number of shares issued by a company is known as stock, but this word is also often used to describe the company itself. For example, you can own a number of different stocks (such as Telstra and ANZ Bank), and you can own a different number of shares in each. Your total holding of all shares you own is known as your portfolio.

Initial public offering (float)

When a company first offers shares that can be taken up by the general public, this is known as an initial public offering (IPO) or ‘float’. The float is usually underwritten, which means a broking firm or financial institution undertakes to purchase any shares left over if the offering is under-subscribed. Shares in an IPO can be purchased by an investor by application only using a document known as a prospectus that contains all information of relevance to potential investors.

Some floats have proved successful long-term investments (such as Commonwealth Bank and CSL), but most floats are rather risky for the simple reason that there's no track record of the business as a public company.

Tip

I suggest you avoid IPOs unless you have some very reliable information that persuades you the investment is likely to be profitable.

Securities exchange

For shares in a public company to be traded by the public at large (rather than by private treaty), they must be listed with a securities exchange; the company issuing the shares is then a ‘listed company’. Before a securities exchange can operate in Australia, it must have a licence granted to it by the Australian Securities and Investments Commission (ASIC). Most Australian companies are listed with Australian exchanges, but a few are listed with overseas exchanges because their business is more relevant to an overseas country. Some shares are listed on both Australian and overseas exchanges, and these can be traded directly by investors overseas and at times when our exchange is closed.

In order to be listed with a securities exchange, a company has to pay fees and comply with listing rules that can be quite stringent and are designed to protect investors. After listing, the company must comply with ongoing rules and may be investigated for possible breaches of rules or behaviour that appears suspect — such as a sudden change in the market price or traded volume of their shares without any obvious reason. Listing rules also stipulate that any new information of relevance to shareholders must be submitted to the exchange and be available to the public before being divulged to privileged parties or released to the press. This rule is designed to eliminate ‘insider trading’, where a select number of investors in the know can profit from information that's not available to the general public.

In Australia, the following securities exchanges operate:

Australian Securities Exchange (ASX), which provides listing and trading in securities and derivatives including shares, futures, options and warrants. It also provides clearing and settlement of trades through the CHESS system (I'll outline CHESS shortly).

National Stock Exchange (NSX), which specifically caters for the listing of small to medium enterprises. Not all brokers are licensed to trade on this exchange, so if you want to trade shares listed on the exchange you need to check.

Chi-X Australia, which may potentially offer lower costs for listed securities. It is a subsidiary of Chi-X Global and is used mainly for global shares but is also often used for transactions in Australian shares.

Notes:

In some cases, a business may choose to list its shares on several exchanges. For example, some shares listed on the New Zealand exchange are also listed on the ASX. In this case you can trade shares in a New Zealand business by placing orders with the Australian exchange.

The ASX is by far the largest and most widely used exchange in Australia, with over 90% of market share and more than 2000 listed entities, so it's the one I'll be concentrating on in this book.

Nowadays the ASX may shuffle share trades with the Chi-X exchange in order to get a better deal. You might notice that some of your share trades were executed via the Chi-X exchange, but it will make no difference to you as an investor.

Delisting and suspension

A listed company can be delisted; that is, it will no longer be listed with the securities exchange and the shares cannot be traded using the exchange trading facility. A common cause of delisting is that a company restructures or is taken over and becomes a new entity. Other causes are bankruptcy, a major breach of legal requirements or exchange rules, or non-payment of fees. Delisting is usually permanent.

Voluntary suspension of share trading may also be imposed by the exchange at the request of the directors, usually because some major change is in the offing and the directors want to prevent speculative trading based on rumour rather than fact. This type of suspension is generally only temporary, usually for no more than a day or two, but it can be longer. Such a suspension of share trading is known as a trading halt.

Tip

Voluntary suspension of share trading can be good or bad news for investors, depending on the nature of the change being considered by the directors. Enforced delisting is almost always bad news as any shares owned by investors become virtually worthless. Remember that the value of almost anything depends on what a buyer is willing to pay for it, so if it can't be sold it's essentially valueless.

Market capitalisation

Market capitalisation (often abbreviated as market cap) is the share price multiplied by the number of shares on issue. It's a measure of the size of a company as reflected by the total number of investor dollars. The largest Australian companies have market caps in the thousands of millions of dollars, whereas the smallest ones may be only a hundred or so million dollars.

Value of a share

The value of a share can be influenced by many factors and is determined by the market. (I will discuss these factors later.) The value of a share is usually taken to be the last sale price, based on the assumption that this is the price at which the shares will trade in the immediate future. This price isn't constant, of course, and can change continually with each trade.

Tip

There used to be a value called the ‘par value’ that was intended to indicate the intrinsic value of a share, but this is no longer used or quoted in Australia.

Types of shares

There are many different types of shares, including the following:

Ordinary shares (also known as fully paid ordinary shares or FPOs) — these are the most common shares owned and traded.

Contributing shares — these shares are not fully paid and the company may call on shareholders to contribute additional funds until a future time when the shares become fully paid.

Preference shares — these shares are given some preferential treatment over ordinary shares, such as first right to a dividend or company assets in the event of liquidation.

Convertible shares or hybrids — these shares usually have a fixed dividend rate based on predetermined criteria. Usually they can be converted to ordinary shares at some later point in time.

Company-issued options — these give the holder the right (but not the obligation) to obtain shares in the company at some future point in time at a stated price.

Rights — these are similar to company-issued options except the time period is usually much shorter and the rights are issued only to current shareholders.

Bonus shares — these are additional shares issued free of charge to current shareholders. In the past, companies often issued these as an intended reward to shareholders, but bonus issues are now very rare, because in fact shareholders didn't benefit as the price fell proportionally after the issue.

Trust units — some companies (typically property conglomerates) are structured as trusts and issue units rather than shares. However, if the units are listed and tradeable, the distinction isn't important from an investor's viewpoint other than that a different taxation rate applies to trust payouts to shareholders compared with share dividends.

Tip

When considering the dividend yield, make sure you also check the level of franking. Many property trusts (and other trusts) have high yields; the catch is that the dividend is almost always unfranked and therefore far less valuable than the same dividend fully franked (franking will be discussed shortly).

Classifying shares

Conventionally, shares are classified into various types:

Blue chip — these are the shares issued by large, well-known, market leader type organisations, including the major banks and other large, established companies. They have a high market share and usually a track record of stable, long-term profits and dividend payments. The shares are expensive but are considered to be the safest, so they're also known as ‘defensives’ because they're less prone to large price falls should the market turn down. They're a favourite of ‘mum and dad’ investors; that is, average Australians with no special share investing or trading expertise who want a relatively safe haven for their savings.

Green chip — these are shares in smaller businesses that have a stable track record but are a little more risky than blue chips and less expensive. They include regional banks, medium-sized established retailers, industrials and others.

Fallen angel — this is a blue or green chip share that has fallen on hard times, with a major reduction in profitability and consequently a big drop in the share price.

Speculative — these are shares in smaller companies that don't have a proven track record of profitability. They generally don't pay a good dividend (often no dividend at all) and they're considered to be risky as they often trade on ‘blue sky potential’; that is, possible future profitability (that may or may not actually eventuate).

Penny dreadful — as the name suggests, these are shares that trade at a low price (sometimes only a few cents) and are very speculative. They present the possibility of large profits if they experience a favourable turn in fortunes but also the possibility of a total wipeout (that is, bankruptcy).

Tip

If you're a newcomer to online trading, I suggest you avoid speculative and penny dreadful shares. While they offer the prospect of large profits, you can also lose heaps in price downturns. The share price can even fall so far that the shares become virtually worthless, in which case you'll lose all the money you've invested in them.

Volatility

Volatility is a measure of the extent and rapidity of percentage price fluctuations, and can be applied to the market as a whole or to any particular shares or investment instrument. A $1 price change in a $10 share is a 10% change, and if this happened in one day it would indicate high volatility. However, a $1 price change in a $50 share (a 2% change) indicates much lower volatility. Volatility is also known as choppiness; imagine a body of water that is relatively calm or choppy depending on the surface wave action.

Tip

As I explain in later chapters, volatility and price risk are closely related, so the more volatile shares are also the more risky. Needless to say, blue- and green-chip shares are usually the least volatile and speculative, and penny dreadful shares are the most volatile.

Trading and parcel

Trading is the act of buying or selling. When you trade shares, you buy or sell a ‘parcel’; that is, a certain number of shares with a certain value. For example, you may place an order to buy (or sell) a parcel of 1000 shares that may be trading for $3.50 so have a parcel value of $3500.

Tip

It's important to remember that shares can't be bought without a seller (or sellers) or sold without a buyer (or buyers), and in all cases both buyers and sellers must agree on the price and quantity.

Board of directors

It's obviously impossible for shareholders in a public company to make consensus decisions on every important issue that arises, so these decisions are made by a group elected by the shareholders to make decisions on their behalf. This group is known as the board of directors (or board). They're often retired company directors or politicians or other well-known Australians. The board periodically hold board meetings (usually once a month) and make decisions on matters of importance to the business. They also appoint the senior executives of the company who are responsible for the day-to-day operation of the business. The board is expected to act at all times in the best interests of shareholders without regard to their own personal interests.

Annual report

The company is required by law to publish an annual report containing basic financial and other information of importance to the business. The annual report is usually a substantial and expensively produced document, so businesses try to reduce the number of copies mailed out to shareholders. Toward this end the annual report is usually made available electronically, thereby reducing the cost to the business. Shareholders are encouraged to access the electronic version and some companies make this the default option.

Tip

Most shareholders won't have the time or expertise to wade through the annual report in detail, so it's often more useful and convenient to review summary reports or shareholder briefing reports that are made available periodically and summarise the details of most interest and importance to shareholders.

Annual general meeting (AGM)

As well as monthly board meetings, the company is required to hold an annual general meeting (AGM) for all shareholders so they can elect board members and have their say and vote on important issues. The principle of one share one vote applies, so the major shareholders can exert the greatest influence. In practice, most shareholders don't attend AGMs so decisions tend to be based on the interests of a small number of large shareholders. If you can't attend a meeting you can nominate a proxy to vote on your behalf. This could be a director; if you are a member of the Australian Shareholder Association, they can vote on your behalf if nominated. An increasing number of companies now make their AGMs available for shareholders in electronic format (such as a webinar) so you can attend the meeting virtually. A recording of the AGM is usually available, as well as personalised voting link(s) so you can vote electronically.

Tip

If you have time to attend an AGM and the location is reasonably convenient to you, it's well worth doing so at least once. Otherwise you may be able to attend virtually.

Profiting from shares

Profit from shares can come from two sources: dividends and capital gains.

Dividends are payments to the shareholders, usually from after-tax profits. Dividends may be franked, unfranked or partly franked, depending on the amount of Australian tax paid by the company on its profits. From an investor's viewpoint, fully franked dividends are best because you obtain a full tax credit from the Australian Taxation Office (ATO) for the profit tax paid by the company. Tax credits are known as imputation credits (or franking credits), and under current law you can receive them as a cash payment even if you don't pay income tax. However, this benefit has been under serious scrutiny as part of tax reform so this could change in the future. Your effective (after-tax) return from a fully franked dividend is higher than if the same dividend is unfranked or partly franked. In fact, under current company tax rates of 30% for large companies, a fully franked dividend gives a return (after tax) that's effectively 42.9% higher than the unfranked dividend.

Dividends are usually paid every six months. Those paid in the first half of the company's financial year are known as interim dividends, and those paid in the second half of the year are known as final dividends. They may be equal, but often the final dividend is greater than the interim dividend. In some cases, shareholders have the option of taking dividends in shares rather than cash, often at a discount price. This option, known as a dividend reinvestment plan (DRP), allows you to increase your shareholding over the longer term without injecting any more of your funds.

Tip

If you're investing for the long term, seek shares that pay good fully franked dividends. If a DRP is available and you can manage without the cash payout, I suggest you join the DRP, as it's a great way to build up your share wealth over the longer term while avoiding the temptation to spend a cash dividend.

Capital gains are profits made when shares are sold at a higher price than the purchase price or, more precisely, when the net revenue from the sale exceeds the total cost of purchase. If you're holding shares that have risen in price, this is known as a ‘paper profit’ and it's not taxable until you actually sell. Selling shares showing a paper profit is known as ‘taking profits’ or ‘crystallising profits’. You then make a realised capital gain, which is profit that you must declare as income in the financial year of the sale.

Tip

You need a good understanding of tax considerations relating to shares, as these can influence your trading decisions. My book Teach Yourself About Shares includes a comprehensive treatment of both capital gains tax and dividend tax.

Return on capital

For an investor (or trader) it's important to focus on return on capital (also known as profit on capital invested) rather than the dollar amount of profit. For example, a profit of $1 per share on a $10 share is a 10% return on capital (which is rather good), but if the share price is $50 the $1 profit per share reduces your return on capital to a paltry 2%.

Tip

Always focus on return on capital rather than the dollar value of capital gains or dividends.

Dividend yield

The dividend yield is the total dividend (interim + final) divided by the current share price and expressed as a percentage. It is effectively the current return on capital invested that has been received from the dividend. Note that the dividend yield will change each time there is a change in share price even though the dividend hasn't changed. If the price goes up the yield goes down