Now that you know how to compile an investment portfolio for retirement, follow these five easy steps to trade your shares on the stock market.
1. Select a stockbroker
To deal in shares you must deal through an authorised stockbroker. You can either deal directly through a stockbroker, or trade via the internet if you want to trade entirely at your own discretion. Stockbrokers offer a variety of services, from merely executing your orders to buy or sell certain shares through to offering you advice, and to actually making investment decisions on your behalf. Obviously, the more services you use, the more it will cost you. The advantage of what is essentially a buy-and-hold retirement portfolio is that you can significantly reduce the amount of advice you actually need.
The important things to know are exactly what services you want and how stockbrokers operate.
There are various JSE Securities Exchange books on sale that provide a wealth of information, including a list of all registered stockbrokers. Most financial services companies, such as banks and asset managers, also offer stockbroking services both direct and/or through the internet. You can also get more information by going to the JSE website at www.jse.co.za
A good place to start, when choosing a stockbroker, is the internet. You can obtain the internet addresses from the JSE manuals. Most of the websites will provide you with information about services offered and what you will be charged.
You must, however, take your time choosing a stockbroker and the services you require. There are stockbrokers and stockbrokers. For example, some have a nasty habit of churning portfolios (buying and selling shares to generate income for themselves).
Many stockbrokers earn their bread and butter doing major transactions for asset management companies and are simply not interested in minnows. You need to find a broker who is interested in small client accounts and prepared to give you the attention you require. And don't hesitate to shop around to get the best deal on commissions the stockbroker charges.
Anscha van Zyl, of Standard Corporate Merchant Bank, says a stockbroker should be selected according to both soft and hard issues.
"Soft" issues include the development of a relationship with yourself and a full understanding of your specific investment profile and requirements. "Hard" issues are equally important and include rated research, quality advice, reputation and integrity. A well-capitalised and independent company ensures this. A customised service and peace of mind are fundamental issues that should be seriously considered.
The main services offered by a stockbroker include:
- Order execution only. The stockbroker will carry out your orders to buy and sell shares;
- Account management. The stockbroker will keep records of all your transactions, the payment of Strate fees and your dividends;
- Advice service. The stockbroker will advise you on your investments; and
- Full discretion. The stockbroker will buy and sell shares on your behalf, making all investment decisions.
Checklist
Here are some questions you could ask a stockbroker before you decide to use him or her:
- How old is the stockbroking firm;
- Does it have an office in your town;
- How does he or she feel about small accounts;
- How many offices does the firm have and how many people does it employ;
- Does the firm send out a newsletter to clients;
- How many institutional clients (namely banks and insurance companies) does the firm have;
- What commission is charged; and
- How does commission vary according to the amount invested?
Stockbrokers can also act in two capacities: as an agent or as a principal.
If your stockbroker is acting as an agent on your behalf, he or she will list your requirements on the JSE Securities Exchange electronic system, JET. That way other stockbrokers know that you are looking for certain shares at a certain price. If another stockbroker has a client who is prepared to sell at that price, the two will clinch the deal.
If your stockbroker is acting as a principal, you will buy the shares from the stockbroking firm itself.
The difference is important because a stockbroker is not allowed to charge you brokerage fees when acting as a principal. The stockbroker makes a profit on what his/her firm paid for the shares and how much you pay. If the stockbroker acts as an agent, you will have to pay brokerage fees.
Some stockbrokers even offer facilities for you to borrow money from them to buy shares. But be warned: you should never borrow money to make an investment. If the investment goes bad, you may find that you are unable to repay the loan.
2. Consider the costs
Buying and selling shares involves numerous costs, including:
- The cost of the shares you bought;
- The brokerage fee plus VAT;
- Marketable Securities Tax or MST; and
- Strate fees for keeping records of your ownership of shares electronically.
Brokerage fees are no longer set by law, so you can negotiate the fee you pay your stockbroker. If you decide on a transaction-only service, the fee you pay is normally calculated as a percentage (usually about one percent) of the value of the shares to be sold or bought. Generally the bigger the purchase or sale, the lower the brokerage fee.
However, if you opt for a better level of service you will pay more.
Lucien Verrezen, the chief executive of Barnard Jacobs Mellet Private Client Services, cautions that you must look at all the fees and how they are structured. His company, for example, does not charge administration fees or any other extra fees, such as those for live prices on the website (some stockbrokers charge up to R600 a year per account for this service). Hence a pure comparison of brokerage charges is not a fair reflection of the total cost of keeping a portfolio.
Marketable securities tax is currently 0.25 percent of the value of your shares.
3. Buying shares
The first step required by a stockbroker is that you place a sum of money in an account with the brokerage - at least enough to cover the costs of your share transactions. Once you have decided on the shares you want to buy, you can approach your broker (in person or by telephone) with an instruction. Discuss the price you wish to pay. If you are happy to buy at the current price, tell him or her so. If you want a lower price, you can instruct the stockbroker to buy if the price falls.
Your stockbroker should be able to tell you whether this is likely or not.
When you give the order to buy, the broker must tell you whether he is acting as an "agent" or as a "principal" (see Step 1).
A few days after the deal has been done, you will receive a broker's note. This note is the most important item in your investment file, particularly with the introduction of capital gains tax. It records the deal the stockbroker has carried out for you, with the price per share, the number of shares involved and the fees payable. You must keep this note for your records.
You must pay the stockbroker within seven business days of the trade being confirmed.
4. Your records
Once the broker has bought the shares for you, your name will be entered as a shareholder in the company's records. In the past, a share certificate would have been sent to you in the post, but now the JSE has converted to an electronic registration of share deals through the Strate system. Once the company in which you own shares has been put on to the system, your record of ownership will be held electronically in a central register.
5. Selling shares
When you want to sell shares, you again instruct your stockbroker and follow a similar process, but this time you are seeking a buyer at the right price. The instructions you give your stockbroker depend on your objective in selling the shares: you might want to sell only at a certain price, or if you want to get out of the share quickly, at the best price obtainable.