Be a successful stockpicker
The easy money in the stockmarket was made last year. This year success lies in being far more selective: you're going to have to pick the winners in order to profit from shares.
If you have the time, skills and knowledge required – as well as the risk appetite – you can take matters into your own hands and pick stocks yourself.
There are a number of routes into share dealing, from a straightforward online dealing account to a self–select individual savings account or a self-invested personal pension (SIPP).
The SIPP is fundamentally different from the other two, as you cannot take the money out of the pension until you retire.
Access to all three of these routes tends to be through a product offered by a stockbroker. Brokers offer three levels of service. By far the most common – and cheapest – is execution-only.
Here you are given the tools you need to research, select, buy and sell stocks online, and left to get on with things on your own without advice or interference.
The advent of online dealing has brought prices down dramatically for execution-only trading. It is easily half, or even a third, of the cost of traditional trading. It also compares well to telephone trades, which tend to cost up to 50% more than their online counterparts.
Even when trading online it's worth being aware of all the charges involved. The big cost is commission. This is either a fixed amount, which starts at around £10 a trade, or it may be a percentage of the sum you are buying or selling.
If you only ever intend to deal small sums, the percentage fee may turn out to be lower. However, if you expect to be putting large amounts through the account in the future, you may prefer the security of a fixed fee.
If you plan to trade frequently, most services will offer a reduced charge for regular dealers. This can bring the costs down significantly.
So, for example, Selftrade reduces its £12.50 dealing fee to £6 if you complete 100 trades a quarter. In addition, you have to add on stamp duty at 0.5% of the trade.
Some services will also charge a fixed fee to cover administration and running the account. So, for example, The Share Centre charges £2.50 plus VAT per quarter, and iDealing charges £5 per quarter.
This is particularly common on self-select ISA accounts, where iWeb charges £17.50 every six months, and Barclays Stockbrokers charges £30 plus VAT on balances up to £7,500 and £50 plus VAT on balances over £7,500.
You also need to watch out for an inactivity fee if you don't complete a set number of trades over a set period. Although less common now, some providers still make this charge. For example, Barclays charges £12 plus VAT for every quarter the account is inactive.
There have been some changes in the market recently with E*trade and Hoodless Brennan pulling out. In the long term, less competition could lead to higher prices.
However, at the moment, the withdrawal of these two players has left the others competing more aggressively for business.
Your trading options
To work out whether an account is right for you, think how you will use it. If you expect to trade fairly regularly, it may be worth paying The Share Centre's administration fee in return for low dealing charges.
(You will need to deal at least twice a quarter for this to constitute a saving.) If you don't intend to trade so often, it may be worth paying slightly more per trade and opting for an account without an administration fee.
There is also another variation on the theme to consider. If you are happy to forgo the instant dealing option you could choose a low-cost account.
These commit to a regular purchase on a specific date every month. The provider then bundles your dealing in with everyone else's, so you benefit from much lower dealing charges.
Interactive Investor, for example, charges £1.50 per trade for this kind of service, and in the current competitive frenzy, it's offering free dealing on its Portfolio Builder until 30 June.
When you are selecting an account, it's not just the charges you need to consider. It's also worth checking out the site of the service you plan to use, to make sure it has all the tools you need and is easy to navigate.
Most will give you easy access to research about the companies, ranging from general news to their latest report and accounts. They will also offer alerts and limits, which will let you know when a share hits a particular price.
You can elect to be notified by email or text about the price rise or fall, or you can choose for the shares to be automatically sold when they hit a particular price – either when it has risen enough for you to take a profit or when it has fallen enough for you to cut your losses.
They also provide practice accounts, allowing you to try your hand at investing in the stockmarket without getting you fingers burnt. Some, such as The Share Centre, also have telephone helplines you can call for advice.
Execution-only trading is a brilliant, lower-cost option for investors who want to go it alone. But if you want a more bespoke approach, and are prepared to pay for it, you could opt for an advisory service. This still allows you to make all the decisions about your investments.
However, you have access to an expert, who can take you through all your options, recommend particular stocks and alert you to any potential buying or selling opportunities.
This service will cost more, though – you will need around £25,000 to access it, but it's a useful approach for investors needing more hands-on assistance.
Alternatively, at the top end of the price bracket are the discretionary services from stockbrokers, where experts make decisions for you. They are like fund managers managing your money in a pot of its own, based on your precise aims and preferences.
These services come at a cost, and you'll need a portfolio of at least £50,000 to get started.
You can get a full list of stockbrokers from the website of the Association of Private Client Investment Managers and Stockbrokers.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
Sometimes known as a trading ISA, a self-select ISA gives investors full control over which assets to include in their ISA, allowing them to choose individual shares and bonds rather than investment funds. Aimed mainly at experienced investors and subject to the same investment limits of a regular ISA, a self-select ISA will usually be managed by a stockbroker on an investor’s behalf.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Describes the relationship between a client and a stockbroker or independent financial adviser whereby the broker or adviser acts solely on the client’s instructions and doesn’t offer any advice on which shares to invest in or financial products to buy and simply “executes” the wishes of the client, regardless if they are judged to be sound or wrong. Other types of broking service offered are advisory (whereby the client/investor makes the final decisions, but the broker offers advice) and discretionary (whereby the broker manages the portfolio entirely and makes all the decisions on behalf of the client).
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.