Share trading online is easy, cheap and booming

Internet brokers can save you cash, but always check out their charges, says Toby Walne

Share trading on the internet is booming, according to new research by the data collector Compeer. Last year, about half of all direct broker trades were done online, rather than by phone or in person. Three years ago, less than a third of people buying and selling shares were using the internet to make their deals.

Share trading on the internet is booming, according to new research by the data collector Compeer. Last year, about half of all direct broker trades were done online, rather than by phone or in person. Three years ago, less than a third of people buying and selling shares were using the internet to make their deals.

Richard Bethell, a director at Compeer, explains: "A key attraction is that internet brokerage services tend to be cheaper than phone deals, yet can provide plenty of free research data. And broadband enables more people to access the internet immediately and make deals without delays."

More than 70 online brokers were trading in 2000, but since the dotcom collapse the number has fallen to about 30. Although those surviving have been forced to be more competitive, the value for money they offer depends on how they are used.

Richard Mason, of Moneysupermarket.com, says: "Advisory brokers may offer invest- ment recommendations before buying and selling shares but charge extra for the privilege. Execution-only brokers, which only trade in shares at your command, tend to be cheaper. But the onus is on the individual to make the right decision."

Whichever broker is used, there is a dealing charge. This can range between £2.50 and £25 for every time a share is purchased or sold, and is payable on top of the agreed share price. There will also be a further 0.5 per cent stamp duty tax payable on the amount handed over when buying a share. And there could be a further administration charge payable for a broker. VAT is also payable on this fee.

The dealing and administration charge may be levied separately or bundled together in the dealing fee package. For frequent traders, this means it may be cheaper to opt for a deal separating the charges, though this is not always the case ( see table). Finally, there are "inactivity fees" to look out for. This means you could be stung with an extra penalty if you rarely buy or sell shares. But you can end up paying less if you are often dabbling in the market.

The ritzy-sounding Barclays Stockbrokers Frequent Trader Club charges members a relatively competitive £12 a trade, but if they fail to trade for three months they will be stung with an extra £10.58 penalty.

The best-value execution-only deals tend to be offered by the less well-known brands, such as Hoodless Brennan, which takes £7 a trade. High-street banks, such as NatWest, can charge more than double this sum (£15), because they rely on brand name and customer loyalty. Look out for charging scales. Some brokers have low charges for small deals which might escalate if you trade in large amounts.

Where the broker makes decisions on the client's behalf, investors should expect to pay commission of at least 1 per cent. These brokers might also add further charges, such as a 1 per cent management fee, on top of dealing and administration fees. Dave Jeal, marketing manager for the online broker The Share Centre says: "Most online brokers hold your money in a nominee account, rather than issuing share certificates, as this is cheaper to run."

Although the investor still owns the share, the broker holds the portfolio on their behalf through the Stock Exchange. This system of ownership is more efficient, enabling settlements to be paid far quicker. But, the investor will not receive company annual reports or accounts.

Another issue is whether you want to save money by allowing the broker to decide when to buy or sell shares during the day. Mr Jeal explains: "We trade in bulk three times a day, which lowers our dealing charges to £2.50 each time. But we can still offer real-time dealing options, but this service costs extra, at £7.50 a trade."

Brokers may demand investors open separate savings accounts from which money can be transferred when trading. These typically offer poor rates of interest. Be aware that the broker may be pocketing an "interest shave" - the difference between what your money is earning in interest and what the broker is paying. When shopping around for the best broker, also look for "free" extras, such as research news, portfolio analysis tools and advice.

Mark Dampier, of the Bristol-based financial adviser Hargreaves Lansdown, points out that before considering an online broker at all, however, it is important to ask yourself whether you actually feel ready to get involved in buying and selling specific shares or not. "If uncertain about single-share trading, then a collective investment such as a unit trust or investment trust might be more suitable, and can still be done through a broker. Remember, these investments can also be held in a tax-efficient Isa."

Investors dealing in single shares can take advantage of tax-efficient wrappers by opting for a self-select Isa, but be aware of additional charges. Mr Dampier says investors should gamble what they can afford to lose and always start by investing small amounts.

An ideal way to begin dabbling directly in individual shares and learn about the Stock Market might be to join an investment club. These are groups of people who club together to make investment decisions. By pooling resources, investors share risk and can later go it alone, having learned from experience.

Proshare: 0906 802 2222, www.proshareclubs.co.uk.

The Association of Private Client Investment Managers and Stockbrokers: 020-7247 7080, www.apcims.co.uk.

'My final decision is made on a hunch'

Betty Pooley, 69, of Norwich, logs on to the internet at least two or three times a day to check on how her shares are performing.

The retired school administrator, married to David, 65, admits she is addicted to online share dealing but has great fun with her moneymaking vice. "I play with about £1,000 during the month, making about four trades a week," says Betty. "As with all gambles, I have lost money, but over time I am definitely up."

Betty got interested in share dealing through a local investment club that she joined with her husband, on retirement. She quit two years ago to go it alone. "I go through all the information on shares in the media and on websites, but ultimately the final decision is made on a hunch."

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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