Guide to Online Stockbrokers
There are currently around 36 branded online securities dealing services in the UK, trading shares, bonds, unit trusts and OEICs, derivatives and even forex and commodities.
The temptation is to select your dealinger on cost. However, as with all other services, the main guiding star should be 'value for money'. In fact, the cost of dealing should come somewhere down the list, behind the range of tradable securities and the types of supporting services you require.
Your securities-dealing service needs to be compatible with your life style. For example, it is no good picking a service that deals 'at live,' if you spend the trading day as a wage-slave in an office.
What Do You Want to Trade?
All services deal in London Stock Exchange (LSE) and the Alternative Investment Market - AIM -stocks, and usually restricted to CREST-eligible securities. CREST is the share settelement company. Ofex Plus stocks are tradable (usually by telephone) on a limited number of services.
Most of the online services will only deal with non-certificated shares. If you are old enough to remember when all shares were certificated, you may well still hold some in paper form. The Abbey Certificated , among others, still deal with certificated stocks.
An increasing number of services support dealing in foreign equities, usually restricted to the USA and European exchanges. A range of foreign stocks are now traded through the LSE's International Retail Service (IRS). These are quoted in sterling and settled by CREST.
You can also deal directly on foreign stock markets although this is usually only available through a telephone service.
You can routinely trade margin products online alongside shares. Margin products include:
Futures (myBroker, Etrade)
Traditional warrants - right-to-buy options that are issued by companies as a sweetener at the time of flotation (Abbey, Direct Sharedeal, ETrade, Halifax, Hargreaves Lansdown, Hoodless Brennan, myBroker, Sharepeople, Stocktrade, TD Waterhouse)
Covered warrants – right-to-buy options issued by financial institutions and dealable with Abbey, Comdirect (Squaregain), Etrade, Hargreaves Lansdown, iDealing, MoneyeXtra, myBroker, TD Waterhouse and The Share Centre.
Contracts for Difference or CFDs (Interactive Investor, Barclays, ETrade, Hargreaves Lansdown, iDealing, myBroker, Self Trade, TD Waterhouse)
Spread Bets (iDealing)
Margin products are so-called because you only have to put a deposit down, to a fraction of the underlying value of the trade. Margin products give you more flexibility than trading the underlying item – selling short for example. Trading on margin has the sometimes alarming effect of amplifying the rate of return, which can be positive or negative.
Collective Funds: Units trusts and OEICs
Investment trusts are routinely traded by online sharedealers, simply because they are plcs and can be treated like shares. See Guide to Investment Trusts.
Many online sharedealers run mutual funds 'supermarkets' where they will buy and sellunit trusts and OEICs and particularly purchase them at a discount on initial charges.
A more recent development is the trading of Exchange Traded Funds or ETFs, which are open-ended tracker funds that are traded on a special division of the LSE. See The Exchange Traded Funds Guide.
ETFs dealers include Squaregain, Halifax, Hargreaves Lansdown, HSBC, iDealing, IWeb, MoneyeXtra, Self Trade, ThisisMoney and The Share Centre.
Self-Select Tax Sheltered Accounts
It is becoming increasingly common for investors to take personal charge of their ISA, PEP and pension management, rather than delegate to professional fund managers:
Self-Select ISAs: Surprisingly, only about half the dealing services offer a self-select ISA service so check this before you sign.
PEP transfers: Similarly, for those who have PEPs moving them from the existing manager is restricted to about half the available services.
ISAs and PEPs are ring-fenced accounts and have their own tariffs. There is usually a periodic management charge based on the aggregate value of investments, often capped or a percentage per year. The percentage version can work out expensive, especially if the investment is merely treading water. It's worth choosing a service where all your ISAs and PEPs are covered by a, preferably low, single fee a year.
Self-Invested Personal Pensions (SIPPs): In most cases, the broker sub-contracts the SIPP administration to an outside agency merely providing the dealing.
Quotations and Dealing
Virtually all online share dealing services are 'straight through processing' (STP) whereby you receive your price quotes from the market via your broker.
However, there are several different kinds of quotations and dealing:
Real-time Snapshot Quotes
Snapshot quotes (also known as “html” quotes) are held for a fixed period of time (e.g. 15 seconds). If you fail to accept the price within the time interval, the quote lapses and you have to request a new one from the broker.
A number of services like Barclays and Squaregain operate 'price improvement services' which improve upon the price for you if it moves in your favour while the quote is being held.
Shares that are bought and sold on the basis of real-time price snapshots are said to be dealt 'at quote'
Live Streaming Prices
Live streaming price quotes (or 'Java' quotes) are not held at all. Prices change continually and simultaneously with those on the exchange. You deal by hitting the trade icon when the price comes within your range. Deals are executed 'at best'. What you see is what you get.
Dealing at live streaming prices is available through day-trader orientated services like myBroker, Power Etrade and TD Waterhouse Pro Trader.
On some services, the price you choose to buy at is not necessarily the price you get. Such deals are executed 'at best'., i.e. the broker gets you the best price they can.
An alternative to dealing at real-time snapshots or live, streaming prices is to programme automated trades that are executed when prices hit a critical level.
A limit order is an instruction to execute a deal when the share achieves a given price. For example, you may give an instruction to buy a given volume of BT Group at a price lower than the current market price, or indeeed higher.
Most brokers will not keep this type of order open forever. An exception is James Brearley & Sons which will hold limit orders open indefinitely:
Kill or Fill limit orders are acted on at once. If the order cannot be “filled”, it is “killed”. This type of limit order is often used for instructions placed after market hours. The broker will try to execute it first thing the next day.
Good for the Day: The limit order is held open up to the end of the trading day in which it is submitted. If it cannot be executed within this time it is killed off.
Good for 'N' Days: The limit order is held open for a given number of days (e.g. 14, 30, 90). The order is executed if the price limit is reached or killed off if it cannot be executed within this interval.
Stop orders are instructions to buy or sell shares at pre-determined price levels. If the price moves very fast, it may not be possible to execute the stop in time:
Stop Loss: An instruction to sell a stock if the price falls to a given level within a set period, in order to limit losses or take gains. On iDealing and Squaregain the trader sets a band rather than a single trigger price.
Stop Buy: An instruction to buy a volume of shares if the price hits a pre-determined level or band to exploit an upward trend in the share price.
Tracking Stop Loss: The stop loss shadows the actual share price as it rises and realises the gains if and when the share price turns down. This is available on The Share Centre Fastrack service.
Commission as a percentage of the market value of the deal, usually to a specified minimum and maximum favours larger deals and discriminates against smaller deals.
A flat dealing fee usually accompanied by an account fee (Egg, iDealing, MoneyeXtra, Fidelity ShareNetwork), although a few brokers charge flat-rate commissions and zero account fees like Hoodless Brennan, IWeb, Saga.
Frequent trader rates offering preferential dealing commissions to investors who place many trades per quarter.
Don't Neglect the Non-dealing Charges
Statutory charges: Stamp Duty at 0.5% on purchases rounded up to the nearest 1p for CREST-settled transactions, and to the nearest £5 for non-Crest-settled stocks plus A levy of 25p on deals above £10,000.
Account setting-up charges
Periodic subscription fees
Account maintenance fees covering dividend processing, corporate actions (takeovers, mergers, splits), The CREST nominee facility, electronic cash transfers and record keeping.
Inactivity charges for not trading within a specified period, usually a quarter.
Stock transfers (in and out) and account closure fees
Duplicate contract notes and paper valuations
Probate valuations and dealing with executors.