Opening your brokerage account

When you start investing in the ASX stock market, there's a lot to consider on this path to building wealth.

Choosing a brokerage service to start buying shares is a vital step in building an ASX share portfolio. Let's examine how it works.

Do you need a brokerage account to trade stocks?

Yes, in Australia, you generally need a brokerage account to trade stocks. A brokerage account serves as a platform through which you can buy and sell shares on the Australian Securities Exchange (ASX) or other international exchanges. Here's a brief overview of why a brokerage account is necessary and what it involves:

• Access to Markets: Brokerage accounts provide access to stock exchanges where securities are bought and sold. They allow you to trade shares of publicly listed companies in Australia and across the globe.
• Transaction Execution: Brokers facilitate the execution of buy and sell orders on your behalf. They manage the technical connection to the stock exchange to ensure your trades are processed correctly and efficiently.
• Services and Tools: Most brokerage platforms offer a range of tools and resources that assist investors, such as real-time market data, research reports, stock analysis, and educational materials. Take advantage of these tools to help you make informed decisions.
• Regulation and Security: Brokerage accounts are managed by brokers who are regulated by the Australian Securities and Investments Commission (ASIC), ensuring that industry standards are met. These regulations help protect investors and maintain market integrity.

Select your brokerage service to buy and sell shares

If you want to invest in shares, you can use a full-service broker or an online brokerage service. There are some major differences between the two, as we'll see below.

Full-service brokers

With a full-service broker, the broker does the trading for you. They can also advise on what to sell or buy. A broker must have a reasonable basis for recommending a particular company, and they must tell you if they have any interest in that company.

The fees in these cases are a percentage of the trade value. You'll typically pay a lower rate for larger transactions. 

For example, you may have a 2.5% fee on a transaction of up to $5,000. For a larger transaction, it may be just 0.1%. Because of this, small trades can end up becoming quite expensive.

It's also worth noting that most brokers will charge you a minimum fee.

Despite these costs, many people are happy to pay these higher transaction fees for the peace of mind of knowing they're receiving help from a professional. Others, however, enjoy the independence of being in charge of their investment decisions.

Online brokerage service

The online brokerage service has become a more popular option in recent years. It enables you to simply open an online trading account and be entirely in charge of your investment decisions. Because you choose which shares to buy and make the share purchases yourself, the fees are relatively low.

You'll have to pay a fee each time you make a transaction, and those fees typically start at about $15 to $20. 

When choosing an online broker, you'll want to consider how much you'll pay in transaction fees. Brokers might also charge other fees. Common ones include a foreign exchange fee, a subscription fee, and an inactivity fee.

You'll also want to see what the brokerage will let you trade. Some platforms only allow you to trade shares in the S&P/ASX 200 Index (ASX: XJO). Other platforms will let you trade on exchanges that operate worldwide.

Some online brokerage platforms are more tailored to casual traders, while others focus on servicing experienced and active traders. Generally, if you're just starting, a platform designed for casual traders is all you'll need.

You'll also want to pick a platform that has reliable customer service. Ideally, their customer service team will be based in Australia. 

How to Choose a Broker

Selecting the right broker requires careful comparison, as brokerage services can differ significantly. Follow these steps to find the best brokerage for your needs:

1. Compare Brokerage Features
   • Some brokers provide extensive educational resources and research reports.
   • Others offer physical branch offices for in-person assistance.
   • Some focus on low-cost trading with minimal features.
2. Determine Your Needs and Investment Goals
   • If you are a beginner, look for a brokerage with:
     • Easy-to-understand educational resources
     • Customer support access
     • A platform to practice trading before investing real money
   • If you are more experienced, consider:
     • Advanced educational resources
     • Insights from professional investors
     • In-depth market data and research tools
   • Experienced traders may also need access to:
     • Options trading
     • Fixed-income products
     • Commodities
3. Research Available Brokerages
   • Several brokerages cater to Australian investors.
   • Two popular online brokerages include:
     • Commsec – Managed by the Commonwealth Bank of Australia (ASX: CBA)
     • Selfwealth Ltd (ASX: SWF)
4. Open a Brokerage Account
   • Once you choose a brokerage that fits your needs, opening an account is typically a straightforward process.

By taking the time to evaluate different brokerage options, you can find a platform that aligns with your investment journey and trading preferences.

Know your investment goals

Your choice of brokerage will also depend on your investment goals. Are you a long-term investor who will trade only occasionally? Or do you intend to trade more frequently? 

Do you prefer a hands-on approach or want to hold your investments over extended periods without frequent monitoring? You should also consider whether you want a brokerage that will assist you in identifying investment opportunities, one that makes it simple to execute trades or a service that offers professional advice. 

Take the time to honestly assess your needs and how much time and energy you have to devote to your investments. These factors may change over time, but start by considering your current requirements rather than trying to anticipate your future needs. Once you understand these, you will be in a much better position to understand which brokerage service will best meet your requirements.

Brokerage fees also need to be considered. However, depending on your investment style, these may be less important than other factors. If you intend to buy and hold, trading only infrequently, brokerage fees will be less of a concern as they will only be incurred occasionally. However, broking fees may be a more critical consideration for day traders as they will add up much faster.   

Brokerage Accounts and Taxes

Holding a brokerage account has a direct impact on your tax situation due to the nature of taxable transactions embedded in investment income and asset management. Here's how a brokerage account can affect your taxes.

Capital Gains and Losses

• Capital Gains: When you sell assets in your brokerage account for a profit, these are considered capital gains and are subject to capital gains tax. In Australia, if you've held the asset for over 12 months, you may qualify for a 50% discount on your capital gains tax, encouraging long-term investment.
  • Short-Term Capital Gains: Gains on assets held for 12 months or less are taxed at your full marginal tax rate.
  • Long-Term Capital Gains: If you hold an asset for more than 12 months, you're usually eligible for a 50% discount on the capital gain. This means only 50% of the gain is added to your taxable income and taxed at your marginal rate.
• Capital Losses: If you incur a loss from selling an investment, this can be used to offset your capital gains, thereby reducing your taxable income. If your losses exceed your gains, they can be carried forward to offset gains in future tax years.

Dividend Income

Dividends received from stocks held in a brokerage account are considered taxable income. Whether reinvested or not, dividends can impact your tax liability. In Australia, dividends may come with franking credits, which can potentially reduce the effective tax rate on this income, as these credits represent tax already paid by the company.

Franking credits: When a company pays dividends, it may attach franking credits to the dividend, which reflect the tax the company has already paid on its profits. For most companies, this is at the corporate tax rate, typically 30%.

You can use these franking credits to offset the tax payable on your dividends. If your personal tax rate is lower than the company tax rate, you might get a refund of the difference.

For example, if you receive a fully franked dividend of $700 with a franking credit of $300, the grossed-up dividend is $1,000 before company tax. You must declare the $1,000 as taxable income. At a 32.5% tax rate, you owe $325 in tax, but since the company already paid $300, you only pay an additional $25. At a 45% rate, you owe $450 and pay an extra $150. Those in lower tax brackets, like 19%, would owe $190 and receive a $110 refund because the company's tax exceeds their liability. Franking credits benefit investors who rely on dividends for income, though taxes apply whether dividends are received in cash or reinvested.

Tax Reporting and Compliance

Brokerage accounts generate various tax-related documents, like DIV-1099 forms for dividends and other records for capital transactions. These documents must be included in your tax return to ensure compliance with tax laws. Proper documentation and reporting help avoid potential issues with the Australian Taxation Office (ATO).

SMSFs vs standard accounts

When you open your brokerage account, you'll have to decide what type of account you want. You have a few options, but for first-time investors, there are generally two main ways to go — standard or SMSF.

A standard brokerage account (under your name or joint with your partner) is your basic, everyday investment account. Generally, any profits you make are subject to capital gains tax (CGT), while losses can be used to offset your future CGT liability. On the other hand, dividends are taxed as income, just like your wages.

Another option is to start a self-managed super fund (SMSF) and open a brokerage account under this structure. We won't discuss whether an SMSF is right for you, as your accountant is the best person to give you that advice.

But if you do buy and sell shares under an SMSF, the income you generate is usually taxed at a concessional rate of 15% — and that's likely to be well below the rate you'll pay on earnings received through standard accounts.

The advantage of a standard account is that you can deposit as much money as you want and withdraw your funds whenever you need to.

You should also be aware that there are costs involved in setting up an SMSF and maintaining it, so you should talk to your accountant about these before deciding.

Creating an account

Now that you've decided the type of account, let's dive into setting one up.

1. Sign up for an account

After selecting the platform you want to use, you need to register for an account. This step is usually free. However, some platforms might charge a subscription or other ongoing fees. 

You can register online and will have to provide:

• Your name, address, date of birth, and contact details
• Your tax file number (TFN)
• Linked bank account details
• Proof of ID.

You will likely have to deposit a certain minimum amount of money to open your account. After your application has been processed and approved, it's time for you to start trading.

2. Options for the self-employed

There are several perks of working for yourself. Unfortunately, superannuation isn't one of them, as the tax system does not compel many sole traders and small business owners to contribute to their retirement savings.

This often means they won't have enough to retire on unless they force themselves to put money aside every month for their super. If an SMSF isn't an ideal option for you, then signing up for a super account run by an industry fund or a private financial organisation is probably the way to go. 

However, you will need to do your homework as fees and investment returns vary greatly. You can compare the performance of the most basic super funds available in Australia (called MySuper funds) through the YourSuper comparison tool.¹ Some funds give you greater control over your superannuation savings, and some allow you to invest your super savings directly in the share market.

No matter what you decide, you have to make it a habit to deposit part of your income into your super account — even if it means cutting back on your coffee habit or cafe lunches.

3. Pick the shares you want to purchase

Perhaps the most anxiety-inducing part of trading is figuring out which shares to buy. Use your brokerage's market research tools to find the best shares for your investment goals. 

Decide if you want shares that bring you value or growth. Many times, when it comes to trading shares, higher risks are associated with higher rewards. Those who are more risk-averse will want to pick shares of value over growth.

You'll also need to consider how many shares of a company you want to buy. This will depend on your investment goals and budget.

It's important to remember that unless you already own shares in a company, the minimum order size via the ASX is $500. So, if you find a company worth $10 per share, you'll have to purchase at least 50 shares. 

4. Place your order

Many novice investors tend to get tripped up when it comes to types of share orders. There are two primary options you need to know about when purchasing shares. You can either buy shares 'at limit' or 'at market'.

A limit order is when you set a maximum purchase price for your buy order. Your trade is automatically executed if the shares you want to buy reach that price. This is ideal for people who wish to purchase shares of a company when the share price comes down but don't want to stare at their computer screens all day.

You should place a market order when you want to buy shares immediately at their current market price.

Depending on the platform you use, you might also be able to use a variety of conditional orders. After you've entered all the specifics of your trade, you'll get to review those details before finally placing the purchase order. 

Once your order is processed, you will receive a contract note with all the trade details, including the company purchased, the share price it was purchased at, and the brokerage fee. You will usually receive these contract notes via email. 

5. Pay for the trade and monitor performance

You'll need to have enough funds in your online share trading account to cover the cost of the trade, including the brokerage fees. 

The trade settlement period on the ASX is two business days. This is commonly referred to as T+2. 

After you've purchased your shares, you will want to monitor their performance. If you have a long-term investing strategy, you won't need to monitor them daily. Checking in on your share performance once or twice a month should be enough.

If you have a medium-term or short-term strategy, you might want to check weekly or daily on your shares.

You can review the performance of your shares by logging into your trading account. Many platforms also offer mobile apps that you can review and trade from. 

6. Selling your shares

Whether you're trying to raise some cash or simply keen to collect some profits, there's going to come a point where you'll want to sell your shares. Hopefully, at a higher price than you bought them for! 

The process of selling shares is very similar to purchasing. You can choose a limit order or a market order. With a limit order, you can set a minimum sale price. With a market order, you'll sell the shares at the current market price. 

FAQ

Are brokerage fees tax-deductible?

Certain expenses associated with purchasing shares, such as brokerage fees and stamp duty, are not deductible as immediate expenses. However, these costs can be added to the cost base of the shares. The cost base represents the total cost of ownership, which is used to calculate your capital gain or capital loss when you eventually sell or otherwise dispose of the shares.

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