Online sharedealing guide
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Why trade online?
The beauty of online share dealing is that the Internet is awash with information, with online share dealing services often supplying clients with extra services such as alerts, tips for the day, real time prices, charting tools, news and analysis. Above all, they offer speed, with trading being almost instantaneous.
The cost of sharedealing 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.
As for dealing costs, these vary, 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?
Take your time when selecting an online share dealing service - there are over 45 in the UK to choose from. So do your homework, read their literature, check out the costs and find out what services they offer.
Most of 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 into which you will need to make an initial deposit so that there is enough money available to settle your trades.
But once this has been done, away you go. Your online trading account is just like a bank account. You can pay money into it via cheque, your local branch, through the post, online or by direct debit. Once the money is in the account, you can trade straight away.
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 (£9,200 in 2007-08), you will normally be liable to capital gains tax (CGT). You may also be liable to income tax on any dividend income.
If, on the other hand you make a loss, you can offset losses against future gains. There is no time limit within which losses brought forward must be used. But note that if you have made a loss in 1996-1997 or a later tax year, you must report it to your tax office within five years and ten months of the end of the tax year in which the loss arose.
So for example, if you are liable to income tax at 40 per cent, then your capital gains on any profit in excess of £9,200 will be taxed at that rate (known as your ‘marginal rate’).
However, remember that from April 6 2008, the 10 per cent tax band will disappear and the starting rate of standard rate income tax will fall to 20 per cent.
Dividend income from shares, on the other hand, is liable to income tax. If you deal heavily in shares, it is advisable to seek an accountant's advice when completing your tax return.
There are, of course, 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 a small amount of advanced corporation tax).
Bear in mind, however, that if you incur losses within an ISA or Sipp you can’t offset these against capital gains you make elsewhere.
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Online versus traditional stockbroker services
When you are trading online, you are often given only seconds to accept the price offered, so to buy the stock at the price you are being quoted you have to move fast. This can be both good and bad. Just because you can trade quickly, it 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 permit trading in derivatives and spread betting.
While online share dealing can sometimes be cheaper than more traditional services, the real benefit of online trading lies is the speed of execution and the freedom to deal in private without a broker knowing your business, and to trade in small amounts.
The downside is that you can’t pick up the phone for advice from a broker. You have to do all the research yourself, so 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 shareholding is likely to be placed in a ‘nominee account.’ This is because most shares bought online are not registered in your name at all, but held by your broker in a nominee account.
This means that you lose all the shareholder perks, such as discounts and vouchers, 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 the Internet. Today nearly 50 per cent of all personal shareholdings in the UK are held in nominee accounts, including equity holdings in Isas, Peps and pensions.
But there is good news on this score. The Company Law Reform Bill currently making its way through Parliament is expected to confer many of these valuable rights on shareholders with nominee accounts. So, when passed, these investors will become fully enfranchised.
One of the most popular shareholder perks used to be P&O’s discounts on cross Channel ferries. Today, 58 companies provide perks of various kinds, but 15 of these don't apply to nominee accounts.
According to Barclays Stockbrokers, 55 per cent of UK investors value having their shareholdings in a certificated format, for this very reason.
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What if something goes wrong?
The obvious risk with online dealing is fraud, whereby someone hacks into your account and siphons off your funds. However, this danger is reduced by the 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 the post comes to your rescue.
For instance, the Share Centre, as a precautionary measure, sends a letter to your home address, (which was established when you provided proof of your identity) for you to sign and return before 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 brokers’ 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 offered by some brokers is the ‘tracking stop-loss,’ which is where you can set a stop loss at a level which fluctuates with the gains you make.
Say 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 share dealing services offer this, so it is worth checking if you think you will require this.
Caveat emptor
Never forget that dealing in shares is a risky business. When trading online, don’t allow yourself to become divorced from reality or mesmerized by the figures on your screen. Share dealing is not like playing with at a fruit machine. Profits can suddenly turn into losses, so never invest more than you can afford to lose.
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Last edited June 2007
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