Shares are back in vogue; now cut the cost of trading
Cheaper online dealing can boost returns from a stronger market, says David Prosser
Saturday 15 April 2006
More than four years after the UK stock market began climbing back from rock bottom, investors have finally begun buying shares again. The latest figures from Compeer, which conducts regular surveys of how many investors are dealing directly on the stock market - rather than using funds - show that the number of trades has doubled to 50,000 a day since the end of last year.
The bad news is that, with investors staying out of the market over the past five years, share dealing firms have been struggling to keep their heads above water rather than spending time thinking about product innovation or modernisation. Critics of the stockbroking industry - including some who are in the business - warn that charges remain overexpensive and overcomplicated.
As a result, there's a real danger that investors who don't choose their broker carefully could end up paying thousands of pounds too much in charges every year, substantially reducing the potential profits on offer, even assuming that share prices keep rising.
Michael Foulkes, the chief executive of TD Waterhouse, the Canadian broker that is vying with rivals such as Barclays, NatWest and Halifax for the biggest share of the UK's stockbroking market, says commissions must come down. It charges £12.50 for each trade - buying or selling - in the UK, considerably more than its sister companies in North America.
"Until now, dealing volumes have not been sufficient to enable most brokers to cut charges," Foulkes says. "As a result, UK investors pay significantly more to trade than their counterparts in the United States and Canada."
However, there are still bargains to be found. Hoodless Brennan, a smaller broker based in London, launched its flat-fee dealing service in 2003 and has charged just £7 for online trades ever since, comfortably undercutting its rivals.
"We first launched an internet dealing service in 2001, with commissions charged as a percentage of deal sizes," says Mike Rayden, online trading manager at Hoodless. "What we quickly realised was that clients were looking for the simplest charging structure possible, which is why we switched to flat fees."
There's no doubt that the majority of brokers are still getting away with overcomplicated charges. The first issue with which investors must grapple is basic commission charges. Hoodless is unusual in charging a flat fee - many brokers' fees are a percentage of the value of the trade you're making.
This means that investors placing large trades lose out - and as there is usually a minimum charge, small deals can be expensive too.
On top of what you pay on each trade, many brokers have administration fees ranging from a few pounds each quarter to annual charges of £100 or more. The headline dealing commissions advertised by brokers can therefore be meaningless. Instead, investors need to think about how often they will trade - and what size deals are likely to be - and then calculate the total level of charges they will pay over a given period; say, a year.
That calculation produces huge variations. Moneysupermarket, the online price comparison service, monitors more than 100 execution-only stockbrokers. Buying one share a month online, assuming an investment of £500 each time, would cost just £77 over a year at Hoodless, according to Moneysupermarket. The most expensive broker in its tables would charge £296 for the same services.
To make the picture even more complicated, some brokers charge "inactivity" fees - if you don't trade regularly, your quarterly administration charges will increase. At the other end of the scale, frequent traders may be able to negotiate a better deal; Barclays Stockbrokers, for example, charges £12 for each online trade, but this falls to £7.50 after you have made 10 trades in a quarter.
Barclays' Emma Rees says: "It's true that people charge in different ways so you need to work out how your investment behaviour fits with the various pricing structures."
Even so, there are some basic rules. The cheapest way to deal is over the internet. Barclays says online investors now account for four-fifths of trades, but expect to pay extra if you want to deal by phone and possibly more for postal services.
Similarly, you'll generally only get the cheaper rates if you are prepared to sign up for a broker's nominee services, which means giving up paper share certificates. Hargreaves Lansdown Stockbrokers, for example, charges a flat rate of £9.95 for online nominee account dealing, but this rises to 1 per cent of the value of your trade, subject to a £15 minimum, if you want to deal using share certificates.
Many people do. "Lots of investors are attached to share certificates," says Paul Dimambro of Hargreaves. "People like holding something physical, it's easy to claim shareholder rights and perks, and many people have got used to dealing this way following the privatisations and demutualisations of the Eighties and Nineties."
It's worth trying to get your choice of broker right first time, since many firms charge exit fees when customers take their business elsewhere. Your new broker may be prepared to cover some or all of such fees - a charge of £10 to £15 for each stock is typical - but there are no guarantees.
Price is not the only issue to consider. You need a broker with robust systems and efficient administration - cheap fees will be no consolation if it is difficult to trade, or your account is mishandled in some way.
Online investors should also compare the research facilities on offer. Brokers provide all sorts of data and information to help investors make stock-picking decisions - some of this is freely available to anyone browsing the site, but at most firms, only customers will have access to everything available. If you conduct extensive research, or using graphing facilities, for example, to choose stocks, this may be an issue.
Finally, do you only want to deal in UK-listed shares? Most of the cheapest online brokers, including Hoodless, have limited international dealing facilities, or charge extra.
The bigger brokers, such as TD and Barclays, may be better value if you want full access to markets in Europe, the US and the Far East.
The different services on offer
Most stockbrokers offer up three types of service. There are also three ways to hold your shares.
* Execution-only services are for investors who know which shares they want to trade, without any professional advice. You give your instructions online or by phone and the trade is executed on your behalf.
* Advisory services are for investors who want to maintain control, but also want guidance on stock selection. Brokers can offer recommendations and advice on portfolio construction, as well as tax planning.
* Discretionary services are for investors who would rather hand over their money to a broker, who will then construct a portfolio in line with their goals and attitude to risk.
* Traditionally, investors who bought shares were sent a certificate as proof of purchase and ownership. It is still possible to trade this way but it is more expensive.
* Most brokers offer nominee services, where they hold shares electronically on your behalf. This is convenient, though it may make it difficult to claim basic shareholder rights, such as the right to vote at company meetings.
* The third way is sponsored membership of Crest, the Stock Exchange's electronic share settlement system. Not all brokers offer this option - and it can be pricey - but it enables you to hold shares electronically in your own name.
- 1 What happens to your body when you give up sugar?
- 2 Licence fee: What is the BBC charge – and how will the changes affect you?
- 3 This is what the photographer has to say about the picture of a weasel riding a woodpecker
- 4 Delhi bus rapist blames dead victim for attack because 'girls are responsible for rape'
- 5 Have sex with your iPad thanks to the new sex toy no-one asked for
'Jihadi John': CAGE representative storms off Sky News accusing Kay Burley of Islamophobia
Durham Free School: 'Creationism taught at' free school facing closure
Ukip would cut billions from Scottish budget to fund English tax cuts
Nearly 100,000 of Britain's poorest children go hungry after parents' benefits are cut
End of the licence fee: BBC to back radical overhaul of how it is funded
Ukraine crisis: Top Chinese diplomat backs Putin and says West should 'abandon zero-sum mentality'
iJobs Money & Business
£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...
£50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...
£20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...
£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...
Day In a Page
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads