Chapter 15. Stockbrokers

You will need a stockbroker who is a member of the London Stock Exchange to carry out the transaction for you when you buy or sell shares. A broker is a go-between, in this case between you and the stock market.

Some large banks offer a dealing service to their customers – you can ask the bank where you have your current or savings account what facilities, if any, are available. The advantage is that you probably wander into your local branch from time to time to draw out cash or pay bills so you are likely to feel comfortable making an enquiry there.

You can buy with cash directly out of your account so there is no need to set up a new one.

The big drawback is that you may have to deal at best price – that is, instruct the bank to buy or sell at whatever price it can get rather than have the flexibility to stipulate the price at which you are willing to deal.

The alternative, which need not be daunting, is to set up an account with a stockbroker. There is no shortage of them and wherever you live you should be able to find one in a town or city near your home, although in these days of mass communications this is not necessary. Many people, though, do prefer to deal with an office that they can visit and meet a staff member to get a feel for the place and discuss their requirements. That way they will be a face, not just a name.

The London Stock Exchange website (www.londonstockexchange.com) has a full list of approved stockbrokers. Look at the bottom of the home page for the column headed ‘Tools and services’ and select ‘Locate a Broker’. This takes you to the website page: www.londonstockexchange.com/exchange/prices-and-markets/stocks/tools-and-services/find-a-broker/locate-a-broker-search.html.

You can call up a list of brokers providing the type of service you want.

Or you can approach the Personal Investment Management & Finance Advice Association (PIMFA), an organisation that represents the overwhelming majority of brokers and investment advisers in Britain. Its website (www.pifma.co.uk) has a list of members. Click on ‘About us’, then select ‘PIFMA Members’. If you click on any name in the very lengthy list you can find the address of the member and a list of services provided.

You will be looking for a stockbroker who is happy to handle small clients, so don’t start looking for the biggest names in the business. They probably won’t want your account unless you are particularly wealthy.

If you are happy using the internet, there are online brokers. They tend to be geared to small accounts and they tend to be cheap. You can easily find them by putting ‘online stockbroker’ into your search engine.

The following table shows a sample of online brokers and their charges. This is for illustrative purposes only and is not a recommendation that you use one of these brokers. Note also that charges may change over time and the number of trades that constitute a frequent trader may vary. Some online brokers wave the quarterly fee if you make a minimum number of trades.

Table 17: Online stockbrokers

Source: Money.co.uk

This is admittedly a bit of a minefield and it is worth spending time visiting websites to see which set of charges suits you best. Bear in mind that at first you will probably be making only a handful of trades in your first year or two but if you reinvest dividends the number of trades will increase as your holdings grow. A flat rate charge per trade becomes more attractive than a percentage charge the more cash you have to invest.

Do not make the mistake of making extra trades just to reduce the cost per trade. This is a false economy, as stamp duty and the spread between buying and selling prices will more than offset your illusory saving.

Best of all is to find a friend or acquaintance who already has a stockbroker. If they are happy with the service they are getting, word of mouth counts for as much in this sphere as it does in finding a handyman or an electrician.

Decide how much you want to invest, either a lump sum or a regular investment, and tell the broker at the outset so you are quite sure they handle your size of account.

Some, but not all, brokers offer services such as self-invested pension plans (Sipps) and individual savings accounts (ISAs). These are vital if you are to make the most of your investments as they offer tax concessions on dividends and capital gains.

Now you must decide what kind of service you require.

Execution-only

With an execution-only broker you take all the decisions. You decide what shares you want to buy or sell and your broker will quote the current price so you can decide whether to go ahead or not. When you buy shares you need to decide how much to invest in each company and calculate how many shares you will get for that amount of money.

If you are confident after reading this book, this is the service for you. You put in your order and the stockbroker buys or sells according to your instructions.

Advisory services

With a broker offering advisory services, you still make your own decisions and the stockbroker will buy and sell only on your say-so – but this time the stockbroker provides expert advice and guidance. Naturally you have to pay extra for the advice.

You should receive research notes produced by the brokers’ analysts and advice tailored to your specific needs.

Charges vary from broker to broker so you will have to shop around. Given the vast number of stocks on the London Stock Exchange, you cannot expect your broker to cover every single one. Some brokers specialise in covering larger or smaller companies, others look at a fixed range of specific sectors. Always ask before you commit yourself.

Discretionary management

With discretionary management, you hand over your cash and the stockbroker takes the decisions for you. The broker has the authority to make investment decisions without your prior approval.

You will need to make it clear what your investment objectives are – for example, whether you want income or capital gains – and whether you want to play as safe as possible or how much risk you are willing to take.

Direct Market Access

Direct Market Access is a new and growing service that lets investors execute trades directly with other market participants on the LSE’s trading services. Direct market access is more widespread in the US. Generally, it is more useful to short-term traders than investors. It is therefore probably best for new investors to trade through traditional methods first.

Confidentiality

Whichever service you decide to use, your stockbroker is under an obligation to keep your financial affairs confidential. This does mean that you can make a full and frank disclosure of your financial position without fear it will fall into the hands of the tabloid newspapers.

If you want advice from your stockbroker you must be completely open, otherwise the advice cannot be tailored to your requirements.

Costs

Commissions

The days of fixed commissions set by the London Stock Exchange have long since gone and brokers are free to set their own charges. Inevitably they are restricted by the knowledge that rival brokers will undercut them if they charge too much. Yet the price of the service you select will vary from broker to broker, perhaps enormously.

Execution-only is the cheapest, as you are doing all the real work. You will be charged so much per trade, either a fixed amount or a percentage of the value of the transaction. Expect to find that there is a minimum charge.

It can cost as little as £5 per trade and you might even get a special offer as a new customer.

Advisory services may levy a charge per trade, an annual fee or a mixture of both. Check how many analysts’ notes you are entitled to per year.

For a discretionary service you will usually pay an annual fee, probably larger than for the advisory service, as the broker is doing all the work. There could also be a charge per transaction, so do give your broker clear instructions to avoid churn (making more buys and sells than necessary).

Your broker should not churn your account but if you feel that the number of deals being made is excessive, find another broker. The broker has discretion but not total control. You can stipulate, for example, that shares in a particular company must not be sold or that you do not want investments in companies you regard as unethical.

The broker should be prepared to set out the fees clearly and it is imperative that you ask what you are going to be charged. The money comes out of your investment pot.

Stamp duty

With all trades on the main board of the London Stock Exchange you will, unfortunately, have to pay stamp duty of 0.5% of the value of the transaction on all share purchases costing more than £1,000, though not on sales. Purchases of AIM stocks are now spared this tax.

Her Majesty’s Revenue & Customs gives full guidance on stamp duty on shares at www.gov.uk/guidance/stamp-duty-on-shares.

Campaigns over many years to get this imposition removed have fallen on deaf ears. No wonder. The chancellor of the exchequer raises £3bn a year from stamp duty on share purchases.

You do not pay stamp duty on purchases of shares quoted on overseas exchanges. So although your broker will probably charge extra for dealing on an overseas exchange, you will recoup the difference by avoiding stamp duty.

Cold callers – a warning

You should only deal with reputable stockbrokers registered with the Financial Conduct Authority. In particular, you should be extremely suspicious of cold callers, the complete strangers who ring you on the telephone out of the blue.

The FCA has on its website (www.fca.org.uk) a register of authorised financial advisers. Do not deal with any company that is not on the list. It is worth reading advice on the site on how to avoid scams.

It is not possible to publish an exhaustive list of known fraudulent operators, as dubious operations and outright crooks simply change their names once they are rumbled.

Although many pretend to be British operations with UK addresses, they are more likely to be working from Amsterdam or Barcelona, and you will have no legal protection and no hope of compensation if you are fleeced. That UK address is probably a mailing address, not a real office.

Nor should you assume that a country such as Switzerland, with its reputation of strict financial rules, will look after your interests in preference to those of a Swiss national if push comes to shove.

The myriad ploys designed to part the gullible from their money are sufficiently numerous and fascinating to fill a book on their own but the general principle is that you are lumbered with an ‘investment’ that is unsellable, in sharp contrast to the London Stock Exchange, which is all about creating a market for the mutual benefit of buyers and sellers alike.

A particular ploy is to offer shares in a company that is unquoted but which is supposedly coming to market soon. You are assured that the shares will soar when they are floated. It’s all promises, most of them meaningless.

Ask yourself this: if something is too good to be true, why should you believe it?