About Stockbrokers

Posted:Abigail Andrews – Saturday, May 26th, 2007

How do I buy Shares?

There are two ways to purchase stocks:

• using a brokerage
• through Direct Investment Plans or Dividend Re-investment plans

Using a Brokerage

If you decide to purchase stocks through a brokerage, you can go one of two ways:

• If you are going to trust the experts to do the right thing, and leave it in their hands, then you should go with the services of a full service brokerage.
• But, if money is a consideration and you don't want to spend the money on a full service brokerage, you can go with a discount brokerage. Even though discount brokerages cost less than full service brokerages, they don't offer the same amount of assistance that the full service brokerages do.

Direct Investment Plan / Dividend Re-investment Plan

If you decide to invest using a Direct Investment Plan or a Dividend Re-investment Plan, check to make that the company that you are interested in investing in offers such plans because not all of the companies do.

Find a Stockbroker

To buy and sell shares you need to find yourself a stockbroker to suit your needs. A stockbroker is a regulated company or professional who buys and sells shares and other types of stockmarket investment on behalf of the investor. All brokers have their pro's and con's, so its hard finding the right one for your needs. Some brokers can have you up-and-running in minutes via the internet, others take a couple of weeks. You can trade with a broker via, telephone, post and internet. Increasingly traders use the internet as it is quicker than any other method.

To buy and sell shares you contact your broker through your preferred means and place an order to buy or sell. The shares are dealt and your account is adjusted accordingly by the broker. That's the easy bit. The hard bit is knowing what to actually buy and sell ;-)

You can find a stockbroker by simply searching the internet, usually the best stockbrokers are those that are recommended, so ask your friends and family if they have ever used one. Firstly though, you've got to look at what kind of investor you intend to be. Read on.

Stockbroker Services

There are three types of stockbroker service to choose from:

Discretionary or Full Service Stockbroker

You brief the stockbroker 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 Stockbroker.

The stockbroker 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 Stockbroker

The stockbroker 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.

Telephone or Internet Access

Whilst some stockbrokers offer both telephone and online dealing services, others are more restrictive. Typically, telephone dealing is £5 more expensive per trade.

If you are lacking confidence, choose a discretionary or advisory stockbroker. More confident investors should choose an execution-only broker to save on the dealing fees. Today you should be looking for a broker that offers online services!

How do I choose a Stockbroker?

To help you choose a broker, ask these questions:

• Can you get free access to news, share charts and online portfolios?
• Will you be able to deal in all stocks, including AIM shares and warrants?
• What are the initial set up costs, dealing charges, and annual administration fees?
• Will you still receive dividends, reports and accounts, and any shareholder perks?
• Does the broker offer real-time dealing or is the service e-mail based?
• If the broker sets up a separate bank account for you, what interest is paid on credit balances?
• What other services are available e.g. dealing in European and US shares?
• Is there a free customer helpline and what hours is it open?

Share Trading Costs

When you buy and sell shares there are basic costs related to every transaction. These costs eat into any profit so you need to be aware of them:

Dealing Commission

All stockbrokers 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 up to £12.50 to trade through a broker with a wider range of services.

Quarterly or Annual Admin Charges

Many stockbrokers 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 fee, (the Panel of Takeovers & Mergers), on all transactions over £10,000 and Stamp Duty at 0.5% of the value of the share purchases.

All of these fees - excluding the statutory fees - will vary from one broker to the next.

Choose a Stockbroker & Opening an Account

What are you waiting for, use the information above to choose a broker. You then need to open an account. This should be straightforward and involve printing-off the form and posting it with a cheque. Others will allow you sign up instantly and debit or credit your account when you need to trade.

Once it is confirmed that you have funds in your account, you are ready to buy your first share. If you have not bought online before, then you may be able to have a dummy-run, since several online dealing sites offer demonstrations. I recommend you do this, it's essential to get used to the site you are going to be using to trade.

Once you have passed through security and entered your details, you will be asked for the EPIC code - a three or four letter code for each share listed. The website should list these for you. You will be asked how many shares you want to buy. You will then be issued a price quote and then given a short time - around 20 seconds - to decide whether you want to buy. Don't forget your stop losses!

If you decide to buy, you will receive confirmation of your order, which you should print off. You should also request a hard copy of your transaction and, if you require share certificates, these should be sent to you within about two weeks of settlement.

A little tip is to consider the time of day at which you deal. In the first and last hours of trading - before 9am and after 4pm - the volume of trading tends to be low. This means that the spread between the price at which you can buy and sell will tend to be wider than during the day. Prices tend to be less volatile between 9am and 4pm.

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