Online Share Trading - Cheaper, Faster, Better
A Zurich Club Special Report
By Michael Wilson
Life was sweet for a stockbroker, back in the lazy, hazy days before Big Bang. He’d turn up for work at nine and drink tea till 10, at which point his telephone would start to ring. Could he pick up ten thousand Glaxo for Mrs Johnston? Was it time to sell Shell? And did he think Rio Tinto was worth a flutter? Or would she be better off with treasury bonds this time?
There are still plenty of stockbrokers who make their money doing telephone trades, but not very many of them are still offering the good old ‘full advisory service’ to their clients. Instead, people want execution-only trading, in which the frills are kept to a minimum and the dealing prices are viciously low.
Stockbroking has become a rather brutal business. And nowhere more so than in online investing, which takes the execution-only service to its limits.
The 1986 deregulation (‘Big Bang’) was only the first of two revolutions that spelled the end for oldstyle stockbroking. For the first time, it allowed the financial muscle of the pile-it-high-sell-it-cheap merchants to compete on even terms with the established players. The second revolution was that the internet came along — perhaps the most powerful democratising force the financial world has ever seen.
And it wasn’t just the ability to trade shares and other investments online that made the difference — rather, it was the accompanying array of publicly-available online information: news feeds, company performance data, investor chat forums, and charting facilities that both inform and simplify the trading process.
Online trading is simple, secure, cost-effective, flexible and liquid. You can access a valuation anytime you need it, get research facilities bundled in with your account and all the broker forecasts you can handle. You can sell out of one holding and use the proceeds to buy another within minutes. If you don’t like the provider you’re with, you can generally shift the whole portfolio to another provider free of charge (with the exception of ISAs). And the chances are that your online broker will handle any statutory communications with the Inland Revenue, while also giving you print-outs of your own account activity. It’s quite a bargain.
Yet online trading also presents new challenges and responsibilities. In the absence of a personal fullservice broker, you need to confront the daunting task of sifting through great swathes of online information — often of pretty mixed quality. How should you go about it? We’ll examine this question shortly but first let’s have a look at costs.
Online share trading: £10 trading and
stop-losses at the click of a mouse...
A standard share trading account will transfer cash into a nominee account run by the administrator from which you can select your own investments. This is both convenient and awkward. Conveniently your account provider collects all dividends, etc, on your behalf and then banks them into your account (unless you specify otherwise); awkwardly you effectively forgo your voting rights and certain other shareholder perks (store discounts, cheap travel and all the rest of it.) As a nominee shareholder, you might also forfeit any windfall bonuses if your bank or insurance company should get taken over.
Dealing costs with these brokers have come down sharply in recent years, to £10 or less for occasional investors and £8 or less for heavier traders. These are for UK purchases, by the way — foreign purchases will normally be more expensive. If you’re using an ISA as a monthly savings vehicle, the fee for your monthly unit purchases can be as low as £1.50.
Account hosting fees vary according to the service being provided, but they may be as low as £2.50 per month for a basic UK share account. Expect to pay more for an ISA account — £5 per month would be typical — but a few providers, such as iii, make no administration charges at all.
Every online trading account gives you so much more than just buying and selling shares. In addition to research and charting tools, some will provide stock filters too to help trawl for bargains. All of them provide ‘live’ share prices (actually 15 minutes delayed, in most cases), and most will upgrade you to fully live prices for a smallish additional fee.
All the major providers will let you specify limit orders, whereby you leave an instruction that you want to buy a particular share automatically if it moves outside a specified price range. Look out for an option that will let you set an automatic stop loss, a useful feature for Communiqué readers, though slightly more expensive. Some will, on request, telephone deal on your behalf if you are unable to execute online.
Do you get the best prices from an online broker? Not usually. If your parcel of shares is unusually large or small, or if the share is thinly traded, you’ll usually fare better with a personal broker who’ll make a bit more effort on your behalf. Platforms like eTrade will often tell you that they’re getting ‘inside’ the going price by getting you a discount on your purchases (or a small premium on your sales), but the result is rarely quite as good as a human intermediary could achieve.
Online share trading: Cheaper ‘tax wrappers’ online too
You need to remember that it can take as much as five working days to draw money down from your trading account, so don’t leave it until the last minute if you need the cash smartly. But you can typically upload funds from your bank account to the trading facility in a couple of days.
Much of UK online trading is conducted within a PEP or ISA wrapper. This insulates investments effectively from capital gains, though dividends can no longer reclaim the 10% dividend tax credit. With regard to permissible investments within either an ISA or SIPP, online accounts are configured so that you can only buy qualifying securities, though the odd rogue investment has been known to slip in from time to time. Some brokers, such as Hargreaves Lansdown, offer guides to help check if you’re unsure.
Your online ISA account will handle routine dealings with the Revenue. Principally it ensures clients do not exceed their annual ISA allowance (currently £7,000, rising to £7,200 in the next tax year 08/09) and providing capital gains and dividend income information required for a tax return.
Running a pension as an online SIPP has so many advantages over conventional pension plans these days it’s no surprise that they are a fast growing part of the savings market. They’re more flexible, they’re cheap, they can be easily converted into other options after retirement, and you stay in full control throughout. A SIPP has the edge over an ISA for investment choice too. It can house a much wider range of investments including cash deposits and even property (although not through an online account!).
Typically, an online SIPP will present you with a fund selector tool. This is similar to a share selector, and helps you to choose funds that suit your priorities and risk profile. This can be adapted over time at modest cost as priorities and circumstance dictate.
As well as shares, you can trade pretty well anything online today — futures, options, spread bets, currencies, contracts for difference — providing you have the necessary collateral. Though ever more popular, such speculative and potentially ruinous opportunities are not the natural turf for the Communiqué though they can provide useful tools on occasion when used judiciously.
Online share trading: Check out these online tools to help you become a smarter investor
Online trading levels the playing field for the private investor and gives you the opportunity to take on and possibly beat the professionals for a fraction of the cost. What you lose is the calming reassurance that somebody’s out there looking after your interests. If you make a lousy decision, there’s no one to blame but you. So how do you improve your chances for making good decisions? Information, of course. Here are some useful online tools:
- Paid for information services. No serious private investor should skimp on good-quality research tools. A Level 2 online subscription at the Financial Times (about £200 per year) provides access to a vast database of newspaper material from 500 or more worldwide business publications. Plus portfolio tracking facilities, charting, email updates and, at extra cost, news updates to your mobile.
A Premium or Premium Plus account at Hemmington Scott (www.hemscottt.com), at £159 and £399 respectively, will give you real-time share price information, portfolio tracking, broker consensus data (also available with the free version), plus information about director dealings, and company fundamentals. You can also get free fundies content from DigitalLook (www.digitallook.com). - The regulatory news service (RNS). These detail disclosures to the London Stock Exchange for all listed companies and are available from www.investegate.co.uk.
- Stock filters. Trawl for bargains by any number of financial ratios including p/e ratios, yields, profit to turnover ratios and so forth. These are widely available and occasionally free, as with iii.
- Discussion forums. Established online site Motley Fool UK’s (http://boards.fool.co.uk), for example, regular contributors include a surprising number of eminent professionals hiding behind daft usernames. Beware spending too much time on these forums, though — they can be seriously addictive, and there are always a few rampers trying to lead you astray.
Finally, a word on security; don’t make it easy for a hacker. Be sure to change your online passwords regularly, and never store them on your computer. Otherwise, what are you waiting for?
Michael Wilson for The Zurich Club
First published on October 9th 2007
Get the day’s big financial news in one easy hit! Fleet Street Daily gives you the financial stories that matter. If you’re an investor, you’ll know the importance of staying on top of the news. Every day brings new events, and those events are what move the markets. With Fleet Street Daily you’re one step ahead of the crowd. Because we don’t just tell you what’s happened – we tell you what it means and what you should do about it. Fleet Street Daily is a lively, relevant and entertaining resource designed to help you make smarter investment decisions. Best of all, it’s 100% FREE! So sign up today!