TheRateTart Online Trading Guide
Contents
- Introduction
- How do Online Trading Companies make money?
- What types of online trading account are there?
- Tips from TheRateTart
Online Trading Accounts provide an execution only share brokerage service. This means that they process transactions as instructed by the user. They do not actively manage your money or advise you on which shares to invest in.
Online Trading Accounts first appeared in the United States in the late 1990s. Their growth was driven by the increase in people investing directly in the stock market during the dot com boom. The number of execution only stockbrokers has nearly halved since the dot com crash. Despite this the number of online investors and overall transactions continues to grow. The main drivers of this growth are lower trading costs in comparison to telephone or face to face channels, and the increased flexibility of being able to manage investments 24x7 via self service channels.
TheRateTart guide to online trading accounts can help choose the best account for your investment style.
How do Online Trading Companies make money?
Most revenues come through the various fees and charges levied. These are split between regular subscription fees and transaction charges. You can find more detail on the various types later on in this guide.
What types of online trading account are there?
All online trading accounts offer a similar set of basic services. The different brokers tailor these services and the associated charges towards different types of investor. A better question to ask is probably what kind of investor you are. The list below is not exhaustive, but does cover the major points to consider in choosing an online trading account.
Size & Frequency of Trading will have a major bearing on your choice of account. If most of your trades are likely to be low in value, a Trading Account with no minimum or maximum dealing charges is likely to work out cheapest. If you are trading in high values, then having an account that puts a cap on dealing charges is probably better value. If you are a frequent trader, look for accounts that offer a reduced or waived annual fee in return for a set number of trades. If you cannot find one of these to suit you, it may be worth paying a slightly higher annual fee than you would like in return for lower dealing charges. There is no fixed answer for this. It is worth spending a little time thinking about your typical trade sizes and frequency to work out what the best option is. It may sound obvious, but if you are a low frequency investor, increasing your trading frequency just to get a lower account charge is not necessarily a wise strategy.
Nominee Accounts are the most common service offered by online brokers. The broker does not issue you with share certificates, but retains these in a pooled nominee account. The main advantage of nominee accounts is that they allow you to perform trades instantly.
If you want to be able to have full shareholder rights in the companies you invest in you will need to request a 'ring fenced nominee account'. With this sort of account the individual shareholder's name rather than that of the broker appears in the share register for that company. This will allow you to vote at AGMs, receive copies of the annual report etc. If share certificates are issued to you then these will need to be returned to the broker before a trade can be executed.
It's worth noting that the law in this area is changing. On November 8th 2006 the latest companies act received royal assent, compelling public companies to give all shareholders equal rights whether they are in a ring fenced nominee account or not. The government has yet to decide the exact date when this law will come into effect, but hopefully this will happen before the AGM season next spring. One fringe benefit of this is that companies sometimes offer valuable perks to their shareholders. For example builders Persimmon offer £3000 off a new home, whilst British Airways offer 10% off flights.
Online Account Security is a cause of concern for many investors. The good news is this is a much bigger concern for the online brokers themselves. There are two reasons for this;
- The broker rather than the investor is responsible for losses due to security failures that are caused by short-comings of the online trading hardware or software. The customer is responsible for taking common sense precautions to prevent their account from being accessed illegally. For example, never reveal your ID or password to anyone, don't walk away from your pc whilst logged in etc.
- For most of the leaders in this field, the online channel is their major or sole source of business. Serious breaches in security damage reputations which in turn hits business. And you can be assured competitors will be keen to ensure the failures of others are widely and loudly publicised...
Self Select ISAs provide a wrapper in which to protect your investments from Capital Gains Tax. Most brokers will wrap your investment in an ISA, but charges for doing this can vary significantly. Ideally find a broker who will bundle ISAs for different tax years together so you only pay one administration charge.
Tips from TheRateTart
Transfer Fees are typically levied when transferring shares out of an online brokerage account (although sometimes they are also incurred when transferring shares in). These charges can add up quite considerably, so it is worth checking out how these are calculated before you open an account. This is especially true if you are starting off small, but thinking big. What's right for you today may not be right for you as you move closer to Gordon Gekko status.
Foreign Trading is not offered by all online brokerage firms. This is in part due to the fact that this is a complex area and not advisable for the less experienced investor. If foreign trading is a must for you, double check this is available and whether extra charges apply.
Telephone based trading is offered by many, but not all, online brokerage firms. If your trades are particularly time sensitive this can provide a useful back up mechanism if you are not able to get online or if there is a technology failure. Be aware though that as the online trading channels usually plug directly into the brokers back office systems, a technical failure could also impact a call centre as much as the web-channel. Check to see whether your broker offers this service and whether use incurs any additional charges.
The Settlement Period is the length of time between a trade being made and the funds from that trade becoming available to the investor. This can vary between 1 and 10 days between different brokers. If you are likely to require funds quickly for use in other investments go for a broker with a shorter settlement period.
Anti Virus and Firewall software is increasingly being bundled with both PC hardware and ISP packages. However to be effective this software must be kept up to date with regular downloads and updates. Some financial services organisations are demanding that users keep these packages up to date or risk losing compensation resulting from online fraud. It is not clear how enforceable such clauses are. However it is worth checking whether your broker has included such demands in their Terms and Conditions.
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