Why trade online?
The beauty of online share dealing is that the
Internet is awash with information, with many online stockbrokers
providing extra services such as alerts, tips for the day, real
time prices, charting tools, news and analysis. Above all, they
offer speed of execution, with trades being executed almost
instantaneously.
The cost of share dealing is also lower
online. With some share dealing services, you can get started with
no initial outlay, while others charge monthly or quarterly fees,
but even these are usually less than £10 a month.
Dealing costs vary considerably, but Barclays
stockbrokers charge £7.50 a trade, (providing you trade more than
10 times a quarter), with no other charges, so the bigger the deal,
the smaller, in percentage terms, the charge.
How do I get started?
There are over 45 share dealing services in
the UK to choose from. So check out the terms and conditions and
what additional services they offer.
Most online dealers will tell you how easy it
is to get started. However, money laundering regulations require
you to prove your identity before you can open an account. So you
will need to send an original bank statement and a copy of your
passport or a utility bill by post to your online dealer before you
can get started.
This enables your broker to set up an online
trading account in your name. Once you have made an initial deposit
into the account so that there is enough cash available to settle
your trades, you are ready to go.
Your online trading account is just like a
bank account. You can top it up at any time with fresh
funds by cheque or BACs payments from your bank account. Once the
money is in the account, you can trade straightaway.
Don't let it be taxing
If you make a profit on your investments in
any one year which exceeds your capital gains tax allowance (£9,600
in 2008-09), you will normally be liable to capital gains tax (CGT)
at a flat rate of 18 per cent. You may also be liable to
income tax on any dividend income.
Since 6 April 2008, the new capital gains tax
rules apply whereby capital gains on share sales are taxed at
18 per cent across the board, with no indexation or taper
relief.
Dividends are paid with a 10 per cent tax
credit. This means that a company paying a £100 gross dividend will
pay you £90 net, and for a basic rate taxpayer, you have no further
tax to pay.
If you are a higher
taxpayer, dividends are taxed at a rate of 32.5 per cent, but
the 10 per cent tax credit reduces this, so that what you actually
have to pay is 25 per cent of the net dividend. So
on a £90 dividend you receive, you would have to pay a further
£22.50 in income tax.
There are ways in which you can shelter equity
investments from tax almost entirely, the most popular being
Individual Savings Accounts (ISAs) and Self Invested Personal
Pensions (Sipps).
Equity investments held within ISAs and Sipps
are free from capital gains tax on gains, and largely free of
income tax on dividends (apart from the 10 per cent tax credit
which cannot be reclaimed).
Bear in mind, however, that if you incur
losses within an ISA or Sipp you cannot offset these against
capital gains you make elsewhere.
Online versus traditional stockbroker services
When you are trading online, you are often
given only seconds to accept the price offered, so you are being
quoted you have to move fast to buy at the price quoted.
This can be both good and bad. Just because
you can trade quickly doesn’t mean you should. Take whatever time
you need, and don't lose your common sense.
Whereas in the old days, chatting with a
broker about a potential stock purchase could make you think twice,
with online share dealing, you’re on your own.
The upside, however, is that you can trade
shares when your broker has gone home. You can't buy shares when
the market is closed, but you can place an order for the next day,
or buy shares in some companies whose stocks are traded in markets
which are open when your broker's offices are closed.
When US companies announce their results, the
news often breaks during the evening, UK time, but with online
dealing, you can normally still trade. The same applies to shares
in other overseas markets.
However, not all brokers allow you to trade
international equities. Those that do usually tap into the London
Stock Exchange’s International Retail Exchange, but not all US and
European quoted companies can be traded via this exchange.
Some services also allow you to trade in
derivatives and spread betting.
While online share dealing can sometimes be
cheaper than more traditional services, the real benefit of online
trading lies in the speed of execution and the freedom to deal in
private without a broker knowing your business, and the facility to
trade in small amounts.
The downside is that you can’t pick up the
phone for advice from a broker (unless you pay for it). You have to
do all the research yourself and if you make a mistake, you have no
one to blame but yourself.
Nominee accounts
Perhaps the greatest disadvantage of online
trading is that your shareholdings are likely to be placed in a
‘nominee account.’ This is because most shares bought online are
not registered in your name, but held by your stock broker in a
nominee account.
This means that you won’t automatically
receive shareholder perks, such as vouchers or discounts off the
company's goods and services, as well as the facility to vote at
AGMs, receive company reports and other key information.
In fairness, this is not just a problem
relating to online trading. Today nearly 50 per cent of all
personal shareholdings in the UK are now held in nominee accounts,
including equity holdings in Isas and Sipps.
If, however, you hold your shares in a
certificated format, you will automatically be entitled to company
perks.
To iron out this injustice, the Company Law
Reform Bill is expected to confer full shareholder rights to those
with nominee accounts. So, when passed, investors with nominee
accounts will become fully enfranchised.
Today, over 50 companies provide perks of
various kinds, but 15 of these don't apply to nominee accounts.
What if something goes wrong?
One of the risks associated with online
dealing is fraud, whereby someone hacks into your account and
siphons off your funds. However, this danger is reduced by the
anti-money laundering regulations.
In a worst case scenario, if someone hacks
into your account, the damage that can be done is limited. A
fraudster might sell some of your stock or buy shares you don’t
like, but the stock bought still belongs to you.
If a fraudster tried to transfer money out of
your account, then the slow arm of snail mail comes to your
rescue.
For instance, the Share Centre will send a
letter to your home address for you to sign and return before any
money can be transferred out of your account.
Another potential pitfall is that your
computer crashes, just as you are about to trade and the deal fails
to be executed, or there is a delay at the broker’s end, in which
case you think that the deal has been executed, but until you
receive written confirmation, you can’t be sure.
Another risk is that you make a mistake.
Before computerisation, if you told your broker to buy 100 shares
and he bought 1,000 by mistake, then he would have been responsible
and you would be entitled to compensation. But, with online
dealing, you have only yourself to blame.
If you do make a mistake, contact your broker
immediately. It may still be possible to correct it.
Limiting your losses
To limit your losses, it is possible to place
a ‘stop loss’ order. This is where you establish an automatic sell
order, which is triggered if your stock falls below a certain
pre-defined level. In this way, you can avoid losses spiralling out
of control.
Another facility is the ‘tracking stop-loss,’
which is where you can set a stop loss at a level which fluctuates
with the gains you make.
So, suppose you buy a share at £10. You could
set a tracking stop loss at ‘10 per cent of the high price.’ The
share price rises to £150, but then falls by 10 per cent to
£135.
It's at this point that the tracking stop loss
kicks in and the shares are sold. Not all online stockbrokers offer
this, so it is worth checking if you think you will
require this service.
Caveat emptor
Remember that share dealing is a risky
business particularly in today’s highly volatile markets. When
trading online, don’t get carried away with
excitement or mesmerised by the figures on your screen.
Share dealing is not like playing at a fruit
machine. Profits can suddenly turn into losses, so never invest
more than you can afford to lose.
For more on online share dealing read our guide to online stockbroker services