Buy shares on a Monday and with any luck you will get a contract note from your broker on Tuesday. Post your cheque that day and the broker should receive it by Wednesday. It will then take three days to clear the cheque. If all goes well the funds should be in your broker's account the following Monday in the nick of time, but with no margin for error along the way.
For investors living outside London, the chances of a day's delay rise significantly, and brokers are empowered to charge interest for every day's delay after the deadline. After a further five days, defaulters face the risk of receiving a formal letter and a pounds 10 fine, and after a further five days the transaction will be declared void and reversed at your expense.
Investors selling stock also have just five working days to get the stock and signed transfers to the brokers, and woe betide the investor who has mislaid the share certificate and needs to apply and pay for a duplicate from the registrars.
Brokers would like their clients to avoid the trap by physically lodging share certificates with the broker for safe keeping, or by transferring shares to nominee accounts, and to keep enough cash on deposit with the broker to finance any proposed new purchases of shares and ensure a smooth settlement within the new five-day period.
Any broker worth his or her salt these days will, of course, provide investors with a proper bank-style account complete with cheque-books and a commercial rate of interest, but this may seem an unwanted luxury for shareholders who only buy or sell shares occasionally. It also implies a degree of permanence in the relationship between broker and punter, which not every investor wants.
Investors who lodge their shares in a nominee account also make themselves ineligible to speak at annual meetings or to get shareholder perks, as offered by around a dozen well-known companies such as Forte or P&O, who have so far resisted all efforts to offer them to nominee holders. Nominee holding companies also take over the right to receive dividends and annual reports, and assume responsibility for any losses, which otherwise come from the compensation fund.
Anyone tempted to transfer shares to a nominee account should make sure they understand exactly where they stand in the case of default; when dividends will be transferred to the beneficial owner; what charge, if any, will be levied for the nominee service; and how the interest on cash balances in the investor's account will be calculated.
On the face of it, the change is a substantial deterrent to the amateur investor. Fortunately, not everyone is quite so wound up about it. The Stock Exchange itself is at pains to point out that investors can still come to arrangements with their brokers to settle over a longer period, 10 days or even more.
Most brokers have made great efforts to attract small investors and it is to be hoped that they are not about to drive them away again.
ShareLink, which now claims to handle 10 per cent of all deals done on the stock market, is offering customers a free-phone advice hotline and a range of options including an extended settlement period, a postal dealing service, a dealing account, or the holding of shares in a PEP. Other brokers please copy.
Five-day settlement represents progress. But it will be a retrograde step if small investors feel pressured into opening special accounts or giving up dealing in shares.