Online Stock Brokers Guide
Broker Definition
A stock broker is a regulated company or professional who buys and sells shares and other types of stock market investment on behalf of the investor. There are three types of stock broker service to choose from:
- A discretionary or full service stock broker. In this situation, you brief the broker on your investment objectives and they make all the dealing decisions on your behalf - an expensive option, but ideal for the faint hearted or absentee investor.
- An advisory broker. The stock broker advises you on which shares to buy and sell, but leaves you to make the final decision - not the cheapest option, but it does offer a degree of reassurance.
- An execution-only broker. The stock broker cannot advise you and will only carry out your instructions to buy or sell. In general, using an execution-only broker is the cheapest way of trading shares.
Broker Choice
There are a number of considerations when choosing a new broker.
- Discretionary, advisory or execution-only? If you are lacking confidence, choose a discretionary or advisory broker. More confident investors should choose an execution-only broker to save on the dealing fees.
- Telephone or Internet access? Whilst some brokers offer both telephone and online dealing services, others are more restrictive. Typically, telephone dealing is £5 more expensive per trade.
- Market availability? There are a huge range of investment products on the market, many of which are now available through the online brokers. These can include UK and overseas equities, PEPs, ISAs, funds, small cap/OFEX equities, CFDs, covered warrants and spread betting. Both the products and prices vary from one broker to the next.
- Availability of additional services? These can be divided into services to help with your trading - such as 'price improvers' and limit orders - and information services, such as charting, research, level 2 pricing and broker tips. Make sure you are not paying extra for a service that you are not going to use.
Typical Charges
There are a number of costs to consider when choosing a new broker.
- Dealing commission - all brokers charge dealing commission on stock purchases and sales. Some charge a flat fee regardless of the size of the trade - others set their commissions as a percentage of the trade value. Expect to pay upwards of £7 through the cheapest broker and £10 - £12.50 to trade through a broker with a wider range of services.
- Quarterly or annual admin charges - many brokers charge either a quarterly or annual fee to cover their 'administrative charges'. Some will waive these fees if you trade every quarter, whilst others never make these charges in the first place.
- Other admin fees - these can include registration fees, custody fees, limit order charges, transfer out fees, charges for issuing stock certificates and corporate action fees. But again, not all the brokers charge for these services
- Statutory fees - you will be charged a £1 PTM (the Panel of Takeovers & Mergers) fee on all transactions over £10,000 and Stamp Duty at 0.5% of the value of the share purchases (1% on Irish Stocks and 0% on Exchange Traded Funds).
All of these fees - excluding the statutory taxes - will vary from one broker to the next. Make sure you get value for money and only pay extra if you are receiving a better service!
Product Range
Outside of the traditional UK equity markets, there are now a huge range of investment products to choose from, many of which are available through the online brokers.
- Funds. Many brokers offer access to a range of funds (investment trusts and exchange traded funds), whilst some offer full fund supermarkets for those looking for more choice.
- Small cap and OFEX shares. Small companies and start-ups not traded through CREST and therefore not available through the majority of online brokers. Potential high returns for those prepared to accept volatile price movements, high dealing charges and a higher level of risk.
- International stocks. It is now easy to trade European and US stock through a UK dealing account. Check whether your broker is offering direct access to the overseas markets or limited access through the London Stock Exchange's International Retail Service.
- CFDs. Derivative instruments designed to replicate the performance of conventional shares, but with far greater leverage - small fluctuations in the underlying share price can quickly lead to profits or losses far in excess of your initial deposit. This is a high risk investment that can be used in both a rising and falling market.
- Spread betting. Speculate on a variety of financial markets or sporting fixtures. The market quotes a likely outcome on the event - the 'spread' - and you bet on each point that you think the index will move away from this spread. Again, a high risk investment that you can use in a rising and falling market.
- ISA wrappers. Many brokers now offer self-select ISAs which allow you to decide for yourself which equities, investment trusts, ETFs, unit trusts or gilts to hold in a tax-free ISA wrapper. Invest up to £7,000 per tax year free of Capital Gains Tax.
Trading
Most of the online brokers in the UK differ slightly in their services, depending upon their technology and their ideas of what constitutes good customer service.
However, all require that you open an account before you can place a trade. This involves the completion and return of a number of forms - with much of the process governed by the current money laundering regulations.
Having opened an account, most brokers require you to fund your account before you can trade - although one or two do allow clients to trade on credit. It is also possible to either transfer shares in to your new account from another broker or 'dematerialise' your paper share certificates.
Once your account is set up, most online services are quite intuitive and allow you to point and click to select the stock and place your order. The only question remaining is what type of order to place:
- A market order. A market, or 'at best', order is an instruction to buy or sell immediately at the best available price. You cannot guarantee the price you will get, but you can almost guarantee that you trade will be executed immediately.
- A limit order. A limit order is an instruction to buy or sell shares at a price of your choosing. You cannot guarantee when, or if, your trade will ever be executed, but if it is, you can guarantee it will be executed at your specified price.
- A contingent stop order. A complex variation on a limit order that allows you to specify instructions to buy or sell stock only when certain conditions are met - i.e. a stop loss order is an instruction to sell stock only if the share price falls below a specified level.
Bid/Offer Spread
A stock broker is an intermediary operating between you and the stock market. It is the stock broker's job to get you the best available price for whatever stock that you choose to deal in.
The actual market for each stock is provided by a group of financial institutions known as 'market makers' (or RSPs in the online broking world), each of whom generate their own bid/offer prices for a range of stocks. Typically, there will be between 3 and 10 of these market makers providing quotes for every stock market listed stock.
The best 'bid' and 'offer' prices for each stock - taken from all the market maker quotes available - are listed on the London Stock Exchange and are known as the 'yellow strip' or 'touch prices'.
How to Choose a Stock Broker?
There's more to choosing a new broker than simply looking for a recognisable name and the cheapest dealing commissions available. Typically you will be entrusting your new broker with savings and investments that you may have taken years to accumulate. Your holiday in the Caribbean and your future peace of mind are at stake! There are a multitude of different broking services available to suit every type of investor. You've probably got a pretty good idea of what you want, but it's still worth checking the options to avoid making a time consuming or costly mistake. Please refer to our ‘Online brokers calculator’ to compare the different UK brokers - it is by no means a definitive recommendation for any of the brokers listed, but represents a good indication of the type of service available to the online investor. Or have a look at our ‘Best buys’ table for a more detailed view of a small selection of quality brokers.
Your level of involvement. The first choice you have to make reflects the overall level of involvement that you want to have in the investment of your money. You can choose between:
- A discretionary or full service broker
- An advisory broker
- An execution only broker
Your access to the broker. The second choice relates to communicating with your broker. This is an important decision - whilst some brokers offer a combination of different access methods, many of the more specialist and best value brokers will restrict your options in order to keep their costs low. Your options include:
- Face to face contact
- Telephone dealing
- Internet dealing
Again, the fact that you are already on the Internet suggests that you are in a position to take advantage of all the benefits now available through online trading.
Broker variables. There are a number of other variables that differ from one broker to the next - it is useful to understand what these variables are and how they differ, before looking at the individual brokers.
- Dealing commission structures
- Management fees and hidden charges
- Bid/offer spreads and price improvement
- Type of investment product - low/medium risk
- Type of investment product- medium/high risk
- Limit orders
- Dealing tools and value-added services
Your trading profile. The final choice of broker account should involve matching your trading profile with the different services and pricing structures available from each broker:
- Your average trade or transaction size
- The frequency at which you trade
- Your attitude towards risk
- Your use of research & additional tools
There are about 40 online brokers to choose from. The right broker will save you time, money and a lot of frustration. Whilst parting company with the wrong broker can take several weeks, or even months, if you need to transfer existing shareholdings out.
