Guide to Sharedealing Online
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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%. 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% across the board, with no indexation or taper relief.
Dividends are paid with a 10% 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%, but the 10% tax credit reduces this, so that what you actually have to pay is 25% 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% 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% 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.
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.
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% of the high price.’ The share price rises to £150, but then falls by 10% 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.
Last edited March 2009
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Nothing in this guide is, or shall be deemed to constitute, financial or other advice or a recommendation to purchase any product or service.
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