The net is revolutionising the way we trade shares. It gives power to the individual investor and cuts prices. In the US, where internet share dealing is well-established, investors who trade online use the service three or four times more often than conventional telephone customers.
Last week, E*Trade became the latest service to offer online stockbroking to UK investors. In the US, E*Trade is credited with kick-starting the internet share- dealing market. Here, it will provide stiff competition.
The main advantages to investors trading online are speed, convenience and price. Anyone who tracks market trends will testify how difficult it can be to get through to a (human) stockbroker when markets are busy.
Electronic systems should not have this problem. Online investors can also set up their trades out of hours for execution the next business day. The sophisticated web interfaces provided by most brokers means it is easy to have all the relevant investment information to hand.
In the US, stockbroking prices have fallen significantly with the arrival of internet dealing. There, the cheapest services are categorised as "discount" brokers: they are not allowed to give any form of advice, but can only buy or sell shares.
Here, E*Trade is offering an entry-level price for investors of pounds 14.95 for transactions of pounds 1,500 or less. Charles Schwab, the largest online stockbroker in the UK, charges 0.9 per cent on the first pounds 2,500 of a trade.
The smaller size of the UK market means that prices may not fall to the lowest US rates - about pounds 5 per deal - but there is still scope for price cuts.
Most brokers charge administrative fees or membership fees on top of commission.
Xest, provided by Charles Stanley, charges a pounds 45 annual membership fee. Most electronic share dealing systems work as nominee accounts, where the broker holds the shares on behalf of clients. The exception is Barclays Stockbrokers, which issues share certificates.
Brokers also offer different levels of supporting services, such as the company research and pricing information on their websites.
"Customers want cheap trading," says Julian Costley, UK chief executive for E*Trade. "But what else is wrapped up in the service is also important. We provide free research and encourage our clients to use good information."
Investors should also look at the level of customer support: is there a helpline, when is it open, and how knowledgeable are the staff?
Clients using electronic services from conventional brokers such as Barclays or NatWest have the option of seeking a broker's advice, for a charge, whereas investors using execution-only services have to make their own judgements.
Investors need to understand how online trading works. Prices quoted on screen are not always the guaranteed price for a trade. There is always the chance that prices will move in the few seconds between displaying a price and carrying out the deal.
A skilled human broker may be able to achieve a better price, or in the case of an advisory service, suggest that a client waits.
For larger deals, achieving a better price can matter more than the commission on a deal.
Online stockbroking has its critics. Day trading, where investors hold shares for a short period of time in the hope of quick profits, is much easier on the net. In the US, day traders have been held responsible for the rapid growth of internet stocks. Here, the number of full-time day traders is tiny, not least because stamp duty at 0.5 per cent on each deal makes it much harder to make a profit.
Experts on internet trading advise against this sort of speculative trading. "If you are going to trade online, don't get too excited," says Nick Saalfeld, senior producer at Compu Serve's finance channel. "Caution is advised, as is using a quality stockbroker."
n Barclays Stockbrokers, www.barclays-stockbrokers. co.uk; Charles Schwab, www. schwab-worldwide.com/ europe; E*Trade, www.etrade.co.uk; Fastrade, www.fastrade.co.uk; Icon (James Brearley), www. jbrearley.co.uk; Stocktrade, www.stocktrade.co.uk; Xest, www. xest.com
BROKER PRICE COMPARISONS
Service Commission Cost to trade
rate pounds 2,0001
Barclays Stockbrokers 1.5% pounds 30.00
Charles Schwab 0.9% pounds 18.00
E*Trade pounds 24.95 (pounds 14.95 pounds 24.95
under pounds 1,500)
Fastrade 0.5% pounds 15.002
Icon (James Brearley) 1.0% pounds 20.00
Stocktrade (Brewin Dolphin) pounds 25.00 fixed pounds 25.002
Xest (Charles Stanley) pounds 20.00 fixed pounds 20.00
1Comparison based on pounds 2,000 traded in UK shares, excluding stamp duty and any membership, set-up or nominee account fees.
2Minimum fee applies.Reuse content