A stock broker is a third party that places your buy (or sell order) on the stock market, and allows you to trade with other investors on the stock market. In Australia, this takes place on the Australian Securities Exchange (ASX), but there are many different securities exchanges all over the world. There are also many different stock brokers which can give you access to these markets (including both your domestic and global markets).

This article will explore what are stock brokers, the rise of online stock brokers and finally some of the best online stock brokers you can use in Australia.

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No more need to visit dodgy financial planners or ‘stock brokers’ anymore

An Introduction to what is a stock broker

First of all, as explained in the articles starting to invest in shares in Australia and Investing in shares for beginners, to buy shares you will need a Broker.

To coin a metaphor, they are almost like a car dealership; They don’t make the cars (the manufacturers do that), but they help you get what car you want and they take a small service fee for connecting you with the manufacturer. They don’t register the car (the RTA does that) and once you’ve bought the car and driven off, they don’t really do anything else for you!

That is how a broker works in general. They help ‘Broker’ a deal between two parties and take a small service fee or percentage of the deal for the privilege. Other examples include Mortgage Brokers who help customers find the bank with the best deal (lowest rate home loan), and even Livestock Brokers who help farmers sell their cattle or sheep.

Back to stock brokers, or share brokers. These are a required third party who helps connect buyers and sellers of shares (such as ETFs). Gone are the days of visiting an actual broker or financial adviser who would act as this third (or fourth party). These days, thanks to the internet, you can do this all much more quickly, cheaply and easily online. Enter the world of the discount online stock broker!

Online stock brokers

Due to the rise of popularity and the ease of conducting business online, many of the big banks now offer online stock broker platforms. These are mostly considered non-advisory brokers which don’t offer any advice regarding your financial situation and whether what your doing is a good idea or not.

This is a good thing, as advisory brokers start to wander into the area of active financial advisers which are statistically proven to under perform even a basic total stock index fund in 87% of cases over the long term!

However, even some non-advisory brokers will provide varying levels of ‘market research’ and advertising to try and convince you to make more trades or to trade more frequently. Remember that these brokers make their money every time you trade, so it is in THEIR interest for you to trade more frequently, NOT YOURS! Every time you make a trade, you make yourself poorer so remember to have some discipline and trade only when necessary as part of your investing strategy (for example I usually only buy index funds once a month).

Discount online stock brokers are generally great for people on the path to FI, as we know that getting wealthy is not about picking stocks to beat the index or timing the market to buy low sell high. In reality, this is a fallacy that is perpetuated by the financial industry to transfer money from the impatient to the patient (and into the profits of powerful corporate investors and financial services owners)

Beware there are no get rich quick schemes! Smart investors know real wealth generation is about living below your means and investing the difference into low fee index funds and leaving it there to compound and grow over time! Low fee’s and continual disciplined investing are the crucial keys, so a Discount online stock broker is your friend here.

Choosing a stock broker

Whilst you could happily use any of these services to invest in index funds and ETFs to reach financial independence, in my opinion some of them are not as efficient as they could be and thus will actually slow down your progress to reaching Financial Independence.

All brokers have varying pros and cons, but almost all of them charge the industry standard high brokerage fees (or even worse, percentage fee’s which rack up even higher transaction costs) and try to encourage you to stock pick and trade more often. High brokerage fees, subscription fees, inactivity fees and even additional management fees (such as the microinvesting platforms charge) all erode your wealth. Ultimately, we can’t control the performance of the stock market, but we can control the fees we pay along the journey!

I actually started investing with ComSec (Commonwealth banks financial division) before I learned about the importance of low fees and came to my senses, switching to a low fee Fintech broker.

Finally, when I am choosing a potential stock broker in Australia, I like to look for one that is CHESS sponsored. This ensures the stocks are held in my name, and not in the company name or in a trust on my behalf.

Not all investing or brokerage platforms are CHESS sponsored (for example many MicroInvesting platforms are not CHESS sponsored) and this can create a massive headache if they ever collapse – it is unclear how you will get your shares back and basically you might have to rely on the ‘goodwill’ of the company to get your holdings. Not being CHESS sponsored also means that the company that holds your shares in custodianship could potentially make money using your share holdings in unscrupulous ways – for example they might retain your dividends, profit by ‘lending out’ your shares to short sellers, or use the collective voting rights of its customers holdings for their own interest.

Online stock brokers in Australia

There are literally hundreds, if not thousands of brokers out there. Some of the biggest ones in Australia are shown below;

Big 4 Bank Conventional Stock Brokers

Of course each of the big 4 banks in Australia have their own financial investing services arm, and provide a conventional brokerage service as well as an online option. These are;

Unfortunately these players do not really offer competitive brokerage costs, and I think they leverage their huge customer base and the lack of knowledge in the community in order to maximise profits. They use the perceived safety of their size as their main marketing tool. I have had direct experience using CommSec Share trading for years.

FINTECH ‘Disrupters’ stock brokers

This category is often considered the best ‘bank for your buck’ since these Fintechs (financial technology services) specialise in online trading. As generally newer companies, they can maintain a competitive edge over the status quo and larger companies due to their relatively small company size. This makes them agile (responsive to change) as they can quickly adapt, use emerging technology and prototype quicker. This typically gives them lower cost overheads and allows them to pass on savings to their customer – you the investor.

So if its so cheap, why doesn’t everybody rush out and start using them? It comes down to trust. Because these are newer companies, people perceive them to be too risky to trade with (which I think is silly since they have to meet exactly the same ASIC regulation standards).

Examples of these include;

Click the links above if you want to see my detailed review on each platform. I currently personally use both Pearler and SelfWealth.

Micro Investing brokerage platforms

Microinvesting brokerage platforms use trusts, pooled funds and fractional ownership mechanics to allow investors to invest smaller sums which can over time, compound into a decent investment. Be wary of fees such as brokerage and management fees however, which can erode the performance of your investments. Some popular micro investing brokerage platforms include;

Check out my dedicated post on Micro investing in Australia for more information. I currently am personally using all of these microinvesting platforms with various amounts of money to test out each one and see how they perform relative to each other

Conclusion

To get started investing, you will need to use a stock broker who act as a third party to broker your dealings with other investors on the various securities exchanges. I hope this article has explained the system and answered your question ‘what is a stock broker?’ as well as provided you with some useful suggestions and tips about choosing a stock broker.

Want to know my personal stock broker? Check out my monthly Net Worth Updates as well as my Personal Resources page where I share all of the tools I use to reach Financial Independence.

Which stock broker do you choose and why? Let me know in the comments below!

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Captain FI is a Pilot based in Sydney, Australia and is passionate about Financial Independence. He writes about Personal Finance and his experiences becoming an investor on track to retire by 30. More about Captain FI

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