NOTE from Pearler: we do our best to share general resources so you can do your own research. When it comes to tax, this is personal to your investing and financial position. We are not a tax advisor, and don't have any information about your personal situation. When investing, there may be tax implications and you should get advice from a licensed tax adviser .
One of the most common questions we receive on the podcast is how to buy an exchange-traded fund (ETF) or shares. To get started, you'll need to find a broker that offers ETFs. Once you've chosen a broker, buying ETFs or shares is as simple as ordering something over Amazon.
In this episode, we'll guide you through picking a broker and placing a buy order for an ETF or shares. With so many brokers out there, it can be overwhelming to choose the one that works well for you. But, it is important to remember that what you buy is more important than where you buy it from. Plus, you can always change brokers later.
How to choose the right broker for you
First things first: you'll need a broker. Think of a broker like a grocery store. Just as Coles and Woolies are both places to buy groceries, CommSec and Pearler are places to buy ETFs. However, brokers do not handpick ETFs for you, much like how Coles and Woolies carry the same or similar groceries.
We’ve used several brokers ourselves, including ANZ Etrade, CommSec, CommSec Pocket, Questrade, Selfwealth, Vanguard Personal Investor, and Pearler. We’ve found that the key is to focus on brokers that align with your investing goals.
For instance, Ana initially joined Questrade and Selfweath. However, she didn’t find the user experience and investing philosophy she wanted. Eventually, Ana settled on Pearler because of its long term focus, and the ease of buying shares in dollar amount ( DISCLAIMER: Ana now works for Pearler ).
Tash started out with ANZ eTrade and then moved on to Commsec and Commsec Pocket. She eventually tried Vanguard Personal Investor and settled on Pearler.
As you can see, there’s no one-size-fits-all approach when it comes to choosing a broker. Consider one that aligns with your preferred investment model (we will discuss that in a bit) and personal investment goals/values.
What are brokerage fees?
Speaking of values, fees are another important factor to consider when choosing a broker. Most brokers charge a transactional fee for each time you buy or sell a share or ETF. However, there may be other fees you need to take into account, such as:
- transaction fees for different markets (like buying us shares )
- foreign exchange fees (also known as FX), which is a fee to transfer money to another currency
- management fees
When it comes to management fees, there are two different types to keep in mind. For micro accounts, there may be a fee for simply holding your fund. But don't confuse this with the management fee of an ETF. The latter is accrued daily and deducted on a monthly basis from the fund assets. This fee is reflected in the daily price of the ETF.
To find out more about the fees charged by different brokers and ETFs, you can do some research online. Google is a great place to start. We’d also recommend checking out the ETF manager's website or looking at the PDS (product disclosure statement) for all the information you need.
Difference between various investing models: CHESS, custodian, and micro
In Australia, there are different types of brokers that use various investment models. Each model has its own pros and cons, so it's a must to understand them before you invest.
1.CHESS-sponsored: CHESS stands for Clearing House Electronic Subregister System. With this type of broker, you'll have direct ownership of each share, and it's tracked on a share registry. This is unique to Australia, so you won't be able to have CHESS-sponsored US shares or ETFs.
The minimum amount to invest is often $500, and you'll get your Holder Identification Number (HIN) which can be used across brokers. Some examples of Chess sponsored brokers include Selfwealth, Stake, Commsec, NAB Trade, and Pearler.
The pros of using a CHESS-sponsored broker include:
- direct ownership of your investments
- the ability to buy and sell through the share registry
- the option to set up your dividend reinvestment plan
- simple to transfer between two Chess sponsored brokers
However, there are some cons to consider:
- minimum investment is higher
- fees can also be higher
- a lot of paperwork that come with it
2.Custodian model: With this type of broker, the assets are held on your behalf by the custodian, which can be the broker or a financial institution. You won't receive a HIN, meaning you have indirect ownership. The broker holds your investments as a custodian, keeping a record of all the holdings under one HIN.
This can make investing a bit more affordable as you can invest smaller amounts. However, it can also come with risks if the custodian holding your funds collapses. Some examples of custodial brokers include Superhero, Vanguard Personal Investor, and Sharesies.
The pros of the custodial model are:
- lower minimums and fees
- less paperwork because the custodian manages it for you
- access to international markets
However, there are also cons:
- you won't have direct ownership, which can make it tricky if the broker goes under
- there may be less fee transparency
- it can be more complicated to transfer brokers
3.Micro model: When you invest in a managed fund, you get units in the fund. Each managed fund pools customers' funds together and then invests it on their behalf. This can be beneficial to those who have smaller amounts to invest. This also may be the option if you want to use round-up features, where you can invest dollars and cents.
Some examples of micro brokers include Raiz, Spaceship, and Pearler Micro.
The pros of using a micro broker include:
- lower minimums
- less paperwork
- and the ability to get into habit-forming investing
The cons include:
- There's often an ongoing management fee
- no direct ownership and limited options
- it can also be harder to transfer without triggering capital gains
- it may be harder to change brokers as your strategy develops
How to buy ETFs and shares
Each investment model above works well with certain investing goals and scenarios of getting there. So it’s worth taking the time to research and decide which one works best for you. Once you’ve chosen a model, it’s time to look for a broker and get started.
Step 1: Choose the right broker
Before you can start buying shares, you'll need to choose a broker. There are a few things to consider when selecting a broker:
- What type of investing model do you want to use? CHESS, custodial, or micro?
- What fees does the broker charge?
- What features do you need in a broker? For example, do you want autoinvest, goal tracking, or tax reports?
- Does the broker have access to the markets you want to invest in?
Luckily, choosing a broker is as easy as buying clothes on the internet - and maybe even easier! Plus, you can always change brokers later on if you need to. Our favourite thing to say is: “what you buy matters more than where you buy it.”
Step 2: Get your documents ready
Once you've chosen a broker, you'll need to provide some personal information to open an account. This includes your ID and TFN. If you're using a chess sponsored broker, they will also set up a HIN for you, which is similar to an account number that's tied to your ownership of the shares.
Step 3: Fund your account
To buy shares, you'll need to transfer money into your account. Some brokers let you automatically purchase shares by pulling from your bank account. Just keep in mind that there may be some financial hoops to jump through, especially if you're investing for the first time.
Step 4: Choose your ETFs/shares
Once your account is funded, it's time to start buying ETFs/specific companies! We have written a blog article that explores choosing the right ETF for goals and preferences. If you are leaning towards individual shares, we recommend reading this one: "Should long term investors buy specific companies?"
You'll need to find the ticker for what you want to buy (for example, VDHG or VAS). Some brokers make it easy to buy shares by letting you input the amount of money you have and figuring out the number of shares for you.
There are several types of orders to choose from: market order, limit order, and stop order.
- A market order means you'll buy the shares at the current market price. This is a good option if you want to buy quickly and don't mind paying the current price.
- A limit order means you'll buy the shares at a specified price or better. If you want to buy a share of XYZ Company for $50 or less, you can set a limit order at $50. If the share price drops to $50 or lower, your order will be executed. While it can be a good way to get a better price, it can also take longer to execute your order.
- Stop order is a way to limit your losses if the share price drops. If the share price drops to a certain price or lower, your shares will be sold automatically. This can be a good way to protect your investment. But it's important to note that stop orders are not foolproof and may not always work as intended.
Just remember that markets are unpredictable and you can't control their performance on any given day. That's why it's important to focus on long-term investing and not worry too much about timing the market.
Step 5: Review and submit your order
Once you've chosen the type of order you want to use, it's time to review and submit your order. Make sure to double-check the details, including the number of shares you're buying and the total cost of the trade. Once you're happy with the details, submit your order and your brokerage firm will execute the trade on your behalf.
Step 6: Decide on your investment frequency
Having a set strategy is important if you want to stay the course and focus on long-term investing. One popular strategy is dollar-cost averaging. It involves buying shares at a regular cadence so that the amount you purchase averages out over time.
Some brokers, like Vanguard Personal Investor, CommSec Pocket, and Pearler, have an autoinvest feature that lets you set and forget your investments. Pearler's Automate, in particular, lets you set the day of the month you want to invest. It could be the day you get your pay cheque, for example. This way, you are always paying yourself first.
Actions of the week
Now, let's dive into our audience question: what was your first experience buying a share or ETF?
If you haven’t already, your first action this week is to sign up with a broker and buy your first ETF. It's a simple way to get started and can help you build a diversified portfolio over time. If you're already investing, send this podcast episode to a friend who needs a gentle nudge to start their wealth journey with you.
We covered a lot here, but this is just the tip of the iceberg! To get the full scoop, listen to the episode for insights learned from buying our first ETF.
Happy investing!
Tash & Ana
