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Going for broke with a full service

Day traders don't make money ... Greed and fear rule. Dale Gillham, Wealth Within

It's never been easier to buy stock online. Does this spell the end for the old-fashioned broker who charges clients for advice? Or, given current volatility, are they needed more than ever? David Potts reports.

The way the sharemarket has been going, it's a wonder a reality show hasn't been made around it, bears and all. There'd be more thrills and spills than slapping some paint on a wall, surely.

Better still, everybody would be reduced to tears halfway through the first episode.

And a blue-chip stock?

Forget it. The banks were the worst shockers of the GFC. In fact, all of the top-20 stocks crashed at some point.

Half had their prices halved, such as the Commonwealth Bank, Rio Tinto, Origin and AMP - all blue chips. If they were any bluer they would have to be sealed in a special section.

For all that, it seems going for broke is seen as better than going to a broker.

The surge over the past 10 years in DIY online discount stockbroking, which can be as cheap as $9.90 for a trade, has made full-service brokers seem, well, pre-digital and expensive.

Or crooks, such as the teacher-turned-stockbroker who was jailed last week for stealing $4 million from his friends, clients and even former students.

Yet it's in a volatile market that advice-offering brokers are most valuable.

"The majority who use online brokers really don't have the knowledge to trade the market," says Dale Gillham, who is the investment manager at Wealth Within and author of the only nationally accredited diploma course in share trading and investment.

"Just because you can punch a couple of numbers in for BHP doesn't mean you know what you're doing," he says.

"If you're a beginner you should use an advice broker because you'll get access to huge experience. They're up with all the research and they understand it."

But the mad market swings of the past few weeks show it's not just beginners who could do with some help, even if just a calming hand.

"Ringing an advice broker will settle your nerves and stop you panicking," Gillham says. "You can also get help with your portfolio construction."

The catch is you have to find the right one.

"It depends on who you pick," he says. "I know excellent ones who help people make money."

Brokerage for a full-service broker starts at about $70, which adds only a cent or two to the average cost per share on a typical trade of $5000. You could lose or gain that in a few minutes of a typical market trading day, let alone one like we saw last week.

"Another $50 in brokerage doesn't matter," a Sydney-based adviser at full-service brokers RBS Morgans, Michael Heffernan, says.

"If you're wrong, the investment decision will cost more than the brokerage. The advice we give might save you thousands."

If you were looking at buying or selling $10,000 worth of a stock and saving $30 to $50 brokerage, "I'd be asking is there anything that I should be aware of which would stop me making the trade", Heffernan says.

Best of both worlds

Some enterprising online traders do just that. These investors will use brokers to pick their brains about a stock, then hop online to buy it.

Heffernan says at conferences and seminars on share trading, he's surprised how little some online traders know about the market.

"They're asking the same questions, which shows they're not as good as they think: 'Why has such-and-such a stock gone down?"' he says.

"Apart from the research base, we have a lot of experience in this dealing room - 250 years of experience of broking. We feed off what we know and who we know. Online it's just you and the computer." Mind you, the computer has a lot on it. Most broking websites are packed with research, usually from the independent Morningstar, which also publishes the well-regarded Huntleys' Your Money Weekly.

They contain every figure and ratio you could ask for, although it's a moot point who bothers to look them up and even then you need to know what to do with them.

Full-service brokers will give an opinion and will know when to time your move for the best price. They subscribe to Morningstar but do their own research as well and will often have regular contact with the company.

True, there are laws against insider trading - not that you'd know, judging by the sudden movements in share prices often seen just before important announcements - and companies must report any analyst briefings to the ASX.

But seeing the whites of the eyes of a chief executive, the long pauses or body gestures might tell you more. And no matter how good a company's assets, if you don't trust the CEO, you wouldn't want to be investing in it.

You need to trust your broker, too.

While brokers must act in the interests of their clients, they're also commission-driven.

A share trader and the author of Shares Made Simple and Charting Made Simple, Roger Kinsky, isn't impressed with advice he's had from brokers and long ago decided to trade for himself online.

"It's galling when you pay somebody for advice: you lose money but still have to pay them," he says.

Still, Kinsky reckons whether you want to go it alone or get advice "depends on the person".

"Say they're retired and never done investing or taken much interest themselves, then a full-service broker is fine," he says.

The truth is, brokers are doing it tough.

"It's a fallacy that brokers aren't interested in mum-and-dad clients. We'll talk to anybody," Heffernan says.

DIY blunders

At least with the right advice you should avoid the two biggest booboos Kinsky says investors make: panic selling when the market drops and hanging on too long to a losing stock. Besides, DIY online trading has its own pitfalls, such as buying a stock for its dividend without realising it's gone "ex", in which case you've missed it not knowing there's a pending rights issue or buyback and buying or selling too early in the day based on what Wall Street has done overnight.

Then there's the temptation to trade too often since it's so easy and apparently cheap.

Thinking of doing it for a living, perhaps?

"Day traders don't make money," Gillham says. "The reality is less than 1 per cent of people can day trade. Greed and fear rule. When you're that close to the market, emotions become amplified because you get sucked in and get eaten up by it."

Because "the more you pull back, the more you'll make", he says mum-and-dad investors who buy and hold "easily make more than day traders, who have higher costs".

Perhaps a big disservice of online broking is that you can see at the click of a mouse the volume of shares being offered or bought.

An unusually large slab rings alarm bells for any share trader because it suggests something's going on.

"They look at the depth of the market. I ask: Why is that relevant? Until there's a trade, there's no reality," Gillham says.

Often large orders are placed before the market opens, then pulled off at the last minute to manipulate the price.

"It's so easy for professional traders to take money off mum-and-dad investors and day traders who've based their order on what the Dow did overnight," Gillham says.

Sophisticated computer trading by the big end of town has changed the game anyway.

"Volume feeds on itself," Heffernan says. "You can look at abnormal volume and buy the stock and it does nothing."

The most celebrated online blunder was BrisConnections, which all but bankrupted some shareholders.

Its shares had slumped to just 0.1?, which is the lowest price allowed by the ASX, suggesting no downside, especially when they were paying a dividend of 5.95?.

Pick up a million of them for just $1000 and they'd only need to rise 1? to make $10,000. Or buy $100,000 worth and a 1? rise would make you a millionaire.

Stop me if this is going to be too painful but the dividend was never paid and, worse, there was a sting in the tail.

They came with an obligation to pay $1 a share to the company imminently and another $1 a year later.

That would have meant coughing up $1 million on what you thought was a $1000 trade. A full-service broker would have warned you but online it's just assumed you know.

Fortunately, the law has been changed to make it mandatory for websites to warn if a stock is partly paid.

Even professional traders admit to online mistakes. Kinsky says he inadvertently added an extra zero to a buy order, so instead of $2000 worth of shares it was $20,000, though since then online brokers have put up a "confirm order" page first. Still, if you're in a rush ...

Other times, he's sold stock only to forget he was in the dividend reinvestment scheme.

Weeks later a statement for 10 shares worth $12 will arrive but it'll cost $25 to sell them.

So what should brokers be saying in this market? "I've never known the market to be so volatile," Kinsky says.

"I wouldn't be buying or selling.

"It's a hold market at the moment - put some spare cash away and wait."

Smart trading, long or short

WHEN a share price can move 20 per cent in just minutes, you'd think a trader would have it made.

After all, the enemy is a market doing nothing.

But you can have too much of a good, or bad, thing.

Michael Hall, a human resources manager by day, is sitting this market out, despite his earlier successes.

"Take your eye off for a day or two and you've done your investment," he says. "I made a profit but got out because this market is too volatile, too scary."

That's saying something since Michael doesn't mind risk, having traded options and Citigroup MINIs, which are highly geared warrants based around an underlying share or index. Both work in bull or bear markets.

MINIs have an inbuilt stop loss, so the downside is limited.

Although designed to make trading safer, Michael found it turned out to be riskier in a volatile market.

A MINI short lets you bet on the price of a stock or sharemarket index falling.

"If you know the direction of the market they're great long or short," he says.

Michael bought a MINI short on the ASX200 a couple of weeks ago that "went bad because the market was so volatile it triggered the stop loss".

Once a stop loss is hit, it's impossible to rescue the trade by waiting for the market to turn.

Finding the time is the problem for Michael. He's even traded while on the train with his mobile phone.

"If you're going to be serious, you need a whole bunch of time, which I don't have," he says. "You can make a lot of money, but with a full-time job I can't do it justice."

So he's waiting for the market to settle, "when there's more positive economic data", before he ventures back. And while he uses an online broker, E*TRADE, he's likely to choose a full-service, advisory broker for trading derivatives, such as MINIs, to reduce the risk of getting caught out by an unexpected market move.

"If I got serious trading options and MINIs, I'd definitely use a full-service broker," he says.

"You need to be able to step back a bit and look at where something fits in your overall goal. There's information overload."

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