There is hardly a single industry on earth that has not been impacted by the ever increasing importance of the internet. Almost all products, even those which were previously hard to come across, can now be found online and purchased, normally at a significantly lower price than you might have paid elsewhere.
The world of stocks and shares is no exception to this trend and, no matter the size of the investment you’re looking to make trading online can seriously reduce the costs you would have, until recently, been unable to avoid.
Execution Only
The majority of internet share dealing operates on an ‘execution only’ basis. This means that the stock broker, who handles transactions on your behalf, will only act under your instructions and will not advise you in any way. This makes the whole process cheaper, as it means that even the best firms, will only be giving you a stripped down version of their full services. However, it means that you are on your own when it comes to making decisions, something you should bear in mind when picking an online trading account.
Nominee Accounts
Another thing to be aware off is that, when trading online as opposed to using paper stocks, the shares you buy will normally be held in what is known as a ‘nominee account’. This means that they are held on your behalf in an account registered to the stock broker.
Dividends that your shares earn will be paid into your account, however, as your name will not appear on the company in question’s register, you may not receive their annual reports. You may also miss out on any other perks that the shares attract.
Of course, you will still benefit if the value of the stocks that you buy goes up, but, as the shares are not in your name, there’s no way that you can sell them on your own behalf. Instead, you’ll need to sell them using the same broker you first bought them through. Further more, you will be obliged to pay a fee if you decide to move your stocks and shares to an account with another firm.
Costs
The costs associated with these forms of account are, on the whole lower than usual. The charges for selling and buying are very low in most instances. For example one firm charges just one percent for buying shares (with a minimum charge of £2.50). These charges are usually higher when it comes to selling. Be cautious of accounts which offer very low charges. They will inevitably make the money back further down the line, normally via a quarterly subscription charge.
If you think you’ll trade large amounts, you can save money by picking an account that charges a flat rate of commission rather than a % rate. As with any other method of buying shares you’ll have to pay a stamp duty of 0.5% of the transaction.
You should also make sure you match the type of account you get to frequency with which you think you’ll be likely to trade. This is because certain accounts will charge you for falling to make a certain number of trades per a month (as it lowers the firm’s commission.) It’s a false economy to save on charges by getting a regular trader account if you don’t intend to use it often.
Frequency of Trading
If you are only going to trade every now and again it might be wise to use an infrequent trader account, where you buy shares in batches from your broker. The online broker will collect these orders from all of their clients and buy them in bulk at a set time of the month. With these accounts there are no ‘inactivity charges’ to worry about, so if you don’t feel like trading you won’t be penalised.
The main drawback here is that the price of shares can change in the time between your order and their purchase. Find out the dates in the month purchases occur and make decisions as close to that day as possible to minimise of the chance of the price fluctuating before your order is carried out. Charges for these accounts are very low.
Regular trader accounts have a minimum requirement on the number of transactions you must make, the advantage being that they are done in real time, so you know for the certain the price you are paying.
Many come with features to help you do this if you are time poor, for example you may be able to set the account to buy and sell into different companies at set prices determined by you in advance.
Other Things to Consider
When picking a broker, make sure they have access to the markets and products you are interested in. Inquire as to whether you can trade stocks kept in an ISA. Make sure the broker supplies good information and see if they provide decent software to help you trade. Many brokers will let you try an account before you buy, which can be a good idea.
Spread Risk
Never invest more than you can afford to lose. Buy into different companies to ensure not all of your eggs are in one basket and use stop loss orders to make sure that, if a share starts to plummet in value you can sell it automatically and limit your losses.
Tax
Regardless of whether you buy your shares online or through other means, remember that any gains you make from increases in share prices will be taxed by the government unless you invest via a self-select ISA.
