Shares are back in vogue; now cut the cost of trading

Cheaper online dealing can boost returns from a stronger market, says David Prosser

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.

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

Life and Style
love + sex A new study has revealed the average size - but does that leave men outside the 'normal' range being thought of as 'abnormal'?
Arts and Entertainment
TV
Voices
The Palace of Westminster is falling down, according to John Bercow
voices..says Matthew Norman
Sport
Steve Bruce and Gus Poyet clash
football
News
Graham Norton said Irish broadcaster RTE’s decision to settle was ‘moronic’
TV
Arts and Entertainment
Jake and Dinos Chapman were motivated by revenge to make 'Bring me the Head of Franco Toselli! '
arts + ents Shapero Modern Gallery to show explicit Chapman Brothers film
Arts and Entertainment
Kurt Cobain performing for 'MTV Unplugged' in New York, shortly before his death
music Brett Morgen's 'Cobain: Montage of Heck' debunks many of the myths
Life and Style
life
Sport
Brendan Rodgers
football The Liverpool manager will be the first option after Pep Guardiola
News
Amazon misled consumers about subscription fees, the ASA has ruled
news
Arts and Entertainment
Myanna Buring, Julian Rhind-Tutt and Russell Tovey in 'Banished'
TV Jimmy McGovern tackles 18th-century crime and punishment
Arts and Entertainment
Paul Whitehouse as Herbert
arts + ents
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Executive - OTE £40,000

    £15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

    Austen Lloyd: Law Costs HOD - Southampton

    £50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

    SThree: Recruitment Resourcer

    £20000 - £21000 per annum + uncapped commission: SThree: As a graduate you are...

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Day In a Page

    Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

    Climate change key in Syrian conflict

    And it will trigger more war in future
    How I outwitted the Gestapo

    How I outwitted the Gestapo

    My life as a Jew in wartime Berlin
    The nation's favourite animal revealed

    The nation's favourite animal revealed

    Women like cuddly creatures whilst men like creepy-crawlies
    Is this the way to get young people to vote?

    Getting young people to vote

    From #VOTESELFISH to Bite the Ballot
    Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

    Poldark star Heida Reed

    'I don't think a single bodice gets ripped'
    The difference between America and Israel? There isn’t one

    The difference between America and Israel? There isn’t one

    Netanyahu knows he can get away with anything in America, says Robert Fisk
    Families clubbing together to build their own affordable accommodation

    Do It Yourself approach to securing a new house

    Community land trusts marking a new trend for taking the initiative away from developers
    Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

    David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

    The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
    With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

    Money, corruption and drugs

    The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
    America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

    150 years after it was outlawed...

    ... America's first slavery museum is established in Louisiana
    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
    Tony Oursler on exploring our uneasy relationship with technology with his new show

    You won't believe your eyes

    Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
    Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

    Moores must go. He should never have been brought back to fail again

    The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
    War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

    The battle for Mosul will unleash 'a million refugees'

    Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn