Small Investors Get Wise to the Web

VedomostiInternet trading systems include all the information needed for market analysis.
Just a few years ago private investors were working with their brokers only in offices or by phone or fax. Today, market players, especially small ones, are moving to the web. This way they can manage their portfolios from home or from work -- all that is required is a computer with Internet access.

The main attraction of Internet trading for private investors is the ease of completing transactions on the stock market. It takes mere seconds to form a full-blown investment portfolio. Following that, you can simply watch your portfolio grow in value, or lose value depending on the stock quotations, or actively try to increase it. All that is required is to install a trading system on your computer, fill out a request to sell or to buy and click "bid" in the menu.

It is not surprising, therefore, that the vast majority of brokers now have their own web-based trading systems.

Moscow brokerages offer their clients one of the popular trading systems, such as QUIK-Broker and NetInvest, or their own systems -- for example, Aton-Line (Aton), Troik@ (Troika Dialog) or Alfa-direct (Alfa Bank).

Modern Internet trading systems include all the information that is required for market analysis -- analysts' studies of companies, newswires, a stock quotations archive as well as programs for analysis and forecasting.

However, the Internet cannot fully replace real brokers -- it can only perform part of their job such as accepting requests to sell or to buy, putting them into the stock exchange system, and notifying a client of a transaction's results and the status of his account.

Even if you decide to do your trading on the Internet, you would still need to pay a visit to a broker in order to do all the paperwork and get your signed copies of the service agreements.

All brokers use security systems to prevent unauthorized access to their clients' accounts. After you sign an agreement, you will receive a login and password and get a PIN or a disk with an electronic key, which is the equivalent of your signature.

When picking a broker, you should also take into account all the costs that go with trading on the stock market. The cost of a depository service usually does not depend on the way a broker and a client choose to communicate. But brokers often lower their commission if a client submits his orders through the Internet.

In addition to the usual brokerage and depository costs, there are also Internet trading-specific expenses. The necessary software is always installed for free, but some companies charge between $10 and $30 per month in subscriber fees for the use of their system. Other companies simply include it in their commission.

The broker's commission is based on the frequency and size of your transactions. This means that brokers are often interested in encouraging clients to increase their turnover and some are keen that clients do not hesitate to buy or sell -- even if there is little money and few stocks left in their account.

In cases like this, thoughtful brokers are willing to lend clients money or shares. They call it a "margin trade," or trading with a shoulder, and it can increase significantly the profitability of transactions. If you expect a certain stock to fall in price and you don't have it in your portfolio, you can borrow it from your brokers, sell it and then, if your predictions were correct, buy in more cheaply later on before returning it to your broker. And you get to keep the profit -- bar the credit percentage.

Internet trading allows you to get a margin credit immediately. All you need do is click on "margin trade" in order to see how big a credit your broker can give you. For example, "credit shoulder 1:2" means that the credit will allow you to double your funds -- the broker is ready to lend you as much money as your portfolio is worth.

However, margin trades are risky and the Federal Securities Commission, which sets the margin trade rules, currently allows a maximum shoulder of 1:2. However, in reality, brokers can get around the commission's limitation and offer a variety of shoulders, some as large as 1:4 or 1:5.

Brokers charge between 15 and 30 percent per year for a margin trading credit, depending on its size and length.

Troika offers its credits for only 10 percent per year. But according to the tax code, a credit that is less than three-quarters of the Central Bank's refinance rate (currently 12 percent) is considered a debtor's material gain (for Troika clients this will be 2 percent off the shoulder). This sum is subject to income tax at a rate of 35 percent.

Those that take advantage of cheap credit from their brokers must mention it in their tax return, said Valentina Akimova, the head of the income tax department at the Tax Ministry.