The cheapest, easiest way to buy shares...

Highlights in this issue:

*** Who offers the best brokerage...?
*** How much money do you need to start investing...?
*** Where do all the trading taxes go... and more...

From Gary Booysen on the top floor...

Dear Investment Academy Reader,

To buy and sell shares on South Africa’s stock exchange you need a broker. You can’t just call up the JSE and buy a couple of shares. Although there are many fancy websites up and running these days that might give you the feel of trading directly on the JSE, the fact of the matter is, you’re still using a broker. They still charge you regular brokerage fees and are regulated by the same acts. And there are hundreds out there. So this week, I’ve decided to do a little investigation on you behalf and let you know who offers the best rates in town.

What’ll it cost me?

Well, brokerage rates at various places differ, but you’ll have to pay a couple of basic charges, no matter who you use.

The below fees are charged whenever you buy and sell shares.

STRATE – Stands for Share TRAnsactions Totally Electronic. It’s a charge levied by the JSE infrastructure to implement electronic settlement of securities in South Africa. (If you’re cursing this fee, curse the fact that the JSE’s a monopoly in South Africa!) It’s 0.005459% of the value traded, with a minimum charge of R10.92. This means, unless you’re buying or selling more than about R200,000, you’ll be charged R10.92.

IPL – Investor Protection Levy, which stands at 0.0002% of the value of the shares traded. It’s levied by the Financial Services Board (FSB).

VAT – 14% payable on the STRATE, IPL and brokerage, which goes to our beloved SARS.

STT – Securities Transfers Tax. This is only charged when shares are bought and is 0.25% of the value of the shares. This fee also goes to SARS.

Do I go with the big 4 banks or an independent?

Let’s look at the big four South African banks: ABSA, Standard Bank, First Rand Bank and Nedbank, and compare them to our preferred independent broker. I’ve put them in that order because that’s the order I managed to find their trading fee structures and the order I rate their online usability. Each offers share trading online and over the phone but, in all four cases, trading online was significantly cheaper so that’s the way we’re going.

Purely based on price, it looks to me that ABSA’s the way to go. Not only was its site much easier to navigate but, trading wisely, you’ll incur minimal charges. With it, you’re going to pay two thirds to half the brokerage you’ll pay with other providers.

WARNING: Know your investment goals

If you’ve been following my Wednesday Investment Academy’s you’d know that, before you start investing, you must know why you’re investing. (To access past issues of the Investment Academy visit www.fsp.co.za.) Though ABSA looks like a clear winner, its minimum charge of R120 is fairly high. This means you need to buy R30,000 worth of shares per trade to exceed this minimum. With ABSA prepared to waive its admin fee if you make four trades per year, this account suits investors that will make large purchases in relatively few companies. I’d say subscribers to our Stockmarket Sleuth service would see the most benefit in this type of account.

If you plan on trading more actively in smaller amounts, Standard Bank is a better option. If you plan to execute three trades or more, your fees will be waived. And, although the brokerage is higher, you’ll hit the minimum amount with individual trades as small as R10,000.

A simple calculation shows that to buy shares in three R10,000 blocks through Standard Bank will cost you R210 (excl. tax).

Even with ABSA’s reduced brokerage, to perform the same transaction, it’ll cost you R360 (excl. tax) to make the same purchase.

So how much do I need to start?

Most brokers will only start trading in increments of R30,000.  It’s not advisable to trade in small amounts, say less than R10,000. The tax and minimum brokerage fees will eat away at your capital and your gains will erode quicker than a sand castle in a tidal wave.

I’d say whether you’re planning on trading actively or just following a buy and hold strategy, the absolute minimum you should bring to the table when building an equity portfolio is R30,000.

Until next time – keep learning!

Gary Booysen
for the Investment Academy