Find a sharedealing service that suits you
Using a sharedealing service is the best way for an investor to get a truly bespoke portfolio and it can be a fantastic way of learning about investing. If money is made or lost, investors can understand why and make sure they do better next time. However, selecting the right service is complex and investors need to be sure of their needs before they sign up.
To some extent, the whole sharedealing industry is homogenous now. Previously, stockbrokers used to offer different types of accounts, depending on whether an investor needed, say, share certificates or advice, but now most people use the same type of account, and most are comfortable dealing online or over the phone.
However, sharedealing services still vary significantly by cost. There will always be a dealing or trading fee. It might be a percentage of the value of the trade or a flat fee.These are usually around £10 per deal for online trades, with dealing over the phone likely to be more expensive.
Costs can be lower for regular investors. Interactive Investor, for example, offers a regular investing service for just £1.50, which is ideal for investors who want to drip-feed money into the markets and don't mind the trade being made on a fixed date every month.
The right deal for each individual investor will also depend on the frequency of trading: some groups offer a lower fee for frequent trades but charge an 'inactivity' fee; others may have a higher fee but no penalty charge if you don't deal during a specified period, which would suit longer-term 'buy or hold' investors.
Ben Yearsley, head of investment research at Charles Stanley Direct, says that beyond straight dealing fees, charging becomes more complicated: "There might be dividend collection fees, which would not suit dividend investors," he says, pointing out that companies such as BP or GlaxoSmithKline pay dividends four times a year and dividend-collection fees can mount up quickly.
"There may be custody fees or inactivity fees, which makes it more complicated knowing which service to use. Dealing fees are easy to compare; it's the next level that's more difficult."
Different groups will also have different charging structures for their tax wrappers, such as ISAs and SIPPs (self-invested personal pensions). On the whole, the cost for the SIPP or ISA wrapper itself should be near zero.There are exceptions, such as complex SIPPs where investors hold commercial property, but these will generally be arranged through a financial adviser.
However, there may be different charges for the underlying investments depending on whether they are bought within a tax wrapper or not. Yearsley believes it is up to individual investors to assess what they want and match it to the service provided.
Support for those who need it
The sharedealing services also differ significantly on functionality. For example, Yearsley points out some have instant share price data. If an investor is dealing daily, this regular share price data is useful, but is unlikely to matter as much for longer-term investors. For other investors, it may simply come down to ease of use of the website.
The information and educational content on different sites will also vary. Most sites now recognise they need to support their investors' decision-making, but some are more proactive than others. At the top end, investors might want to buy into a full advice service.
They receive share tips and advice from brokers, from which they can make decisions. This is the traditional stockbroking model and is still offered by many groups, though it is more expensive. Other groups offer an 'advice-lite' proposition. For example, The Share Centre has a small advice team, which doesn't charge.
Elsewhere, Damian Stansfield, managing director of Halifax Share Dealing, says that companies will have other tools to help investors through their decision-making process.They have risk-assessment tools, for example, to guide investors to the right sort of investments for their needs.
There are also tools to help them manage risk effectively: "We have limit orders, for example, which is one of our risk-mitigation tools for customers.This means they can sell only at the level they want to sell."
From there, there may be information on funds or companies that investors can use for research. Some brokers offer access to full stockmarket information on individual companies. Stansfield says this is the most widely used part of the Halifax site, and investors will often access the research multiple times before investing.
The type of support an investor needs will often depend on the amount they have to invest. Yearsley says: "If someone is investing £5,000 to £10,000, they will probably be happy dealing online, but if they have £250,000, they will probably want to speak to a broker for advice and guidance."
Some brokers offer internationally listed shares, meaning investors could – if they wished – look at groups such as Coca-Cola or Colgate-Palmolive in the US, or L'Oréal in France. However, Stansfield says the vast majority of Halifax Share Dealing's clients still focus on the UK.
He says: "We find it important to offer a broad spectrum of investments. People trade when they see an opportunity and some of it is counterintuitive. For example, when there was bad news on HMV, there was a lot of activity in retail names in the UK as people saw the opportunity to pick up a bargain."
He says investors are increasingly looking to international names, with Apple one of the most heavily traded shares on the group's platform. For the time being, Halifax's investors have not moved into more esoteric markets, such as Asia. Stansfield says that the group's research suggests that most investors prefer to access these markets through UK-listed stocks.
Ultimately, different sites are targeted at different types of investors and investors need to be sure they are with the right team. For example, the Halifax service tends to attract less-experienced investors, who need plenty of information and a site that is easy to use.
Others, such as Interactive Investor, may attract day traders, who deal frequently and need to keep costs low. More traditional brokerage houses, such as Redmayne Bentley, may attract investors with large portfolios, who want to make their own decisions but need some guidance and ideas.
Graham Spooner, an investment research analyst at The Share Centre, says: "Some investors want overseas stocks, others like spreadbetting. It's important to look at the charges to ensure long-term investors aren't getting hit with inactivity fees and day traders aren't getting hit with high dealing costs. There is a range of different accounts and investors need to find the right one to suit them."
Using a sharedealing service should enable investors to build the portfolio they want, and picking the right service is an important part of that decision.
Five questions to ask before you select a sharedealing service
1. What are the dealing charges?
2. Are there custody fees, inactivity fees or dividend-collection fees to bear in mind?
3. How easy is the site to use? Spend some time on the site before committing.
4. Does it offer tools and research aids that suit your style of investing? Some sites target novice investors while others are aimed at more experienced traders.
5. Do you need advice?
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.
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.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.