Share dealing explained

So you own a few unit trusts, maybe a work pension. But now you want to buy and sell shares in the market for yourself. Perhaps you’ve been persuaded of the merits of exchange-traded funds and investment trusts. Or maybe you’ve found a hot tip that you want to get into (in which case, just remember that hot tips often leave you with burnt fingers).

Whatever the reason, the fact is, if you’ve never done it before, the idea of buying and selling shares in individual companies can seem a little daunting, or even a bit mysterious. But don’t be put off. In terms of actual mechanics, investing in shares, both in Britain and overseas, has never been easier or cheaper for private investors.

Essentially, there are three ways of buying shares: you can use the stockbroking services offered by your bank; you can do it over the telephone via a traditional stockbroker; or you can buy shares online using a share dealing service. You can find out more about the first two options here. Right now we’ll focus on the most common method – online share dealing.

What is online share dealing?


Online brokers offer “execution-only” dealing services. In other words, all they do is take your order, then ‘execute’ it for you. They don’t give you any advice – they just try to find the best price for you.

The good thing about this simplicity is that it means share-trading services can be offered cheaply. Where once a stockbroker was something only a very rich person could afford, nowadays investors can trade from less than £10 a deal.

How does online share dealing work?


Once you’ve chosen a broker (and we’ll get to that in a moment), the first thing to do is to open an account with your broker and send them some money (‘fund your account’). Then, when you’ve decided what shares you want to buy (check out the rest of our website for tips on how to do that), you’re ready to give the broker your instructions.

On a typical share dealing website, the first thing you will be asked is your username and password. Next, you will be asked what company you want to buy, and how many shares, or what cash value of shares you want. You will then get a price quote and a short amount of time (around 15-20 seconds) to make up your mind whether to do it.

If this sounds a bit fraught, don’t worry. You’ll soon get used to it. If you don’t want to do the deal, you can wait, have a think, and come back to it (although possibly at a different price). For added peace of mind, you can use limit orders (which mean you don’t buy above a certain price, or sell below a certain price), or stop-loss orders (which limit your loss if the market moves against you). Once placed, the broker will email you confirmation of the order, and the deed is done.

How do I pick an online broker?


First, decide whether you want the option of telephoning your broker as well as dealing online. Some brokers charge extra for this facility, but others don’t. Next, do you want to be able to deal in American and other international shares as well as on the UK market? If so, how much extra will your broker charge you?

Will they give you access to instruments other than equities, such as contracts for difference (CFDs), which are an increasingly popular way of accessing international markets? How much interest does the broker pay on the unused cash in your trading account and what discounts/penalties are there for frequent/infrequent trading? And do you want to hold your shares in a self-select Isa, or self-invested pension plan (Sipp)? There will be separate charges for these wrappers.

Another issue to be aware of is the type of account you have. Nominee accounts are the most common, and the cheapest, but these do have their drawbacks as we explain in detail here. We’re not saying you should avoid them – but you just need to be aware of their limitations.

But don’t get paralysed by indecision. You can always change broker if you find that you have different needs in the future, as you become more confident and experienced.

Merryn

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