"Wide diversification is only required when investors do not understand what they are doing." Warren Buffett

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CHOOSING A STOCKBROKER

Choosing a stockbroker is a bewildering process for those new to the market. Deciding which broker to choose will depend on what services you require and on what criteria, if any, you have when it comes to trading shares.

Your profile as an investor is an important thing to consider. Once you have determined what you want out of your investment, you can make various decisions based on this personal profile. For example, is cost your main concern, or is getting advice and access to research the most important function of a broker for you?

Only stockbrokers are licensed to buy and sell shares for the public and therefore, it is essential you find, and set up an account with, a broker, before you think about trading.

Stockbrokers tend to fall into one of two categories: advisory (full-service) and non-advisory (execution only). Within the non-advisory category, one has the option of trading over the phone or online. It is important to weigh up their fees and charges and the services and benefits each offers, before deciding which one to go with.

Advisory broker (full-service)

The first category is the advisory, or full-service, broker. They advise you as to what shares they think you should buy, give you access to their research reports, manage your portfolio and sometimes they will offer you shares in a float (shares that may be difficult to get otherwise).

For example, ABN AMRO Morgans, the advisory broker, was the underwriter (which means they arranged the sale of an issue of shares) of Babcock & Brown Power (BBP). The general public found it very difficult to gets shares in this float, but ABN AMRO Morgans clients were offered shares at $2.50. On the day the stock floated (that is, the day that the shares were listed on the stock market), it traded as high as $2.70. So being offered shares in floats is one advantage of an advisory broker.

The downside is that the fees are higher than for non-advisory brokers, as you are paying for the advice and the other services they offer. Another drawback is that an advisory broker usually works on commission and hence will pay more attention to clients with a larger portfolio, since they are the major source of income for the broker. So, if you have only a small amount to invest, this type of broker may not be appropriate for you. Furthermore, as brokerage fees are usually negotiable with advisory brokers, you are more likely to be able to negotiate a better rate when your trades are of a greater size and frequency, and so you are somewhat disadvantaged if you aren’t trading with a lot of money or frequently.

The relationship you have with your advisory broker is a unique one, in that it must be nurtured in order to achieve the best results. A successful advisory broker/client relationship requires time and good communication. Both parties must know each other well for the relationship to work effectively.

Non-advisory broker (execution only)

The second category is the non-advisory broker. They generally offer cheap brokerage to their clients, but they also provide a no-frills service. Most offer no advice, no company research and no special attention.

They can, however, add value with good execution and by providing market feedback to clients. Non-advisory brokers are great for those who know what they want to buy or sell and merely need a broker to facilitate the transactions.

Non-advisory brokers offer an online service in addition to the traditional phone service. Internet broking fees are without a doubt the cheapest, however, the service provided can be somewhat limited and for the inexperienced, there are certain traps one must be wary of.

As you are buying and selling on your computer, you do not have a broker to watch over you, making sure you get what you want at the price you want. So it’s a kind of do-it-yourself service, which comes at a discount.

Conclusion

Once you have decided what kind of broker you are after, finding one is easy. Simply visit the ASX website at www.asx.com.au/resources/brokers/index.htm

It is important to be aware that you are allowed to use more than one stockbroker. You can have an account with a non-advisory broker, for those times when you know exactly what you want to buy, and you can have an account with an advisory broker if you occasionally require some access to research and floats.

Profile: Warren Buffett

Far and away the most famous and successful stock market investor of all time.

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Why Invest in Shares?

Beyond shares being the best long-term investment and having tax benefits, they also offer other advantages, including flexibility and liquidity.

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