Dealing shares over the web has never been simpler – or cheaper.
Execution-only brokers have driven down costs to as little as a fiver plus stamp duty and many have done away with the old percentage based way of calculating commission in favor of an easy-to-understand flat fee.
That said, there is still a bewildering array of alternatives offered by the High Street banks and the scores the bespoke internet dealers – and all of them vying for your business.
Since plumeting fees and increased transparency, there are a number of potentially costly pitfalls awaiting the unsuspecting trader new to online investment. Below I show how to avoid them:
Choosing a broker should be easy and based on the best available deal. But you may wish to pay a little extra for a reliable service. By this I mean a website that does not crash or freeze as soon as you log in, and is simple and easy to use. As a rule of thumb, do not pay more than £ 12 per transaction. And look out for the hidden charges such as annual administration fees that push up the cost of the service.
A good piece of advice is to open accounts with two competitive brokers and chose the most impressive. Among the hidden costs of trading is tax. Every time you trade you are liable to stamp duty, which is charged at 0.5pc. And if you are lucky enough to make a profit of more than £ 8,500 in any one year you will be liable for capital gains tax, which is charged on a sliding scale from 10pc-40pc.
Signing up is simple enough. Most sites have a wizard that will guide you through the process of opening an account in just ten minutes. Ironic then that you may have to wait a week before the service is fully functioning because the paperwork has to be filled out, signed and returned with proof of identity. Most brokers require a utility bill and banks statements and one even requests for your national insurance number. So have these to hand. With some electronic brokers you may have to deposit cash – usually around £ 500 – and purchases will be funded from this. Others simply debit and credit your account.
Once you've signed up you will be issued with a password and username that gives you access to the trading screen. Log on to the active area of the website and your senses are immediately assorted by all sorts of information.
First step is to decide which country's stocks you want to trade. It is fair to say most people will opt for UK. It is then a case of deciding which particular share you want to buy or sell. It would be straightforward to if you just entered the company name and hit the return key. But instead most sites will insure you provide the a two or three letter letter – called an EPIC – that identifies that company. You'll find a search facility that allows you to look it up. Make sure you enter the correct EPIC, otherwise you'll end up buying shares in the wrong company. Believe me, I've done it and it costs me about 30 quid to sell back what I bought.
Once you have entered the unique company code, you will be presented with two prices for shares in the company. The lower of the two is the bid price – the amount per share the broker will pay for your stock. The higher figure is the offer price, or what you will pay to acquire shares. The difference between the two is called the spread and it is the profit the broker makes buying and selling shares. Again you must be careful to enter the correct number of shares – count the zeros. You do not want to be buying 60,000 shares at £ 1 each when you intend to sell 6,000 at 10p. Thankfully I have not done this yet.
Some basic rules of investment. Always do your research. That means reading the financial pages and book marking sites such as Reuters, ADVFN and the BBC.
Relying a tip from a block down the pub will seriously damage your wealth.
Set a stop-loss. Very simply, if you buy shares you expect them to go up rather than down. If they start to head south then considering selling if the price falls between 15pc and 20pc. Reinvest your dividends. It's a no-cost way of growing your investment. Invest only in companies you understand.
Good luck and be careful out there.