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How to avoid being 'ripped off' when investing
By taking a cut of up to 20% or 30% a pop, market makers' fees can be a huge cost when it comes to trading small stocks. Here, Bengt Saelensminde explains how to minimise them.
Okay, so I ignore all the warnings. I'm forever reading that "it pays to switch" electric, water, phone orinsurance,but I just don't have the time and energy for this penny pinching. I mean, how much difference can there be?
And then I was knocked for six; now I'm hopping mad. What's more, I now see that most of these utility providers work in exactly the same way as some of the stock market crooks do too. The only thing is that I've known how the financial markets rip people off for years. I kind of assumed things were different in the tightly regulated world of utilities.
How nave I was.
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If you know all about rip-off utilities, then all power to you. But what you may not know is that you can be ripped off in the financial markets in exactly the same way.
Today I want to show you how you can save a small fortune by shopping around when you invest.
Ripping off the weak and apathetic
I don't spend as much time on administration as I ought. I'm sure I can get better deals on many of my monthly outgoings. But I've always shied away from adding hassle to an already complicated life.
I mean, how much difference can there be - a different logo on the bill? After all, they're only billing companies aren't they; it's the same gas, water, or electricity coming down the tubes isn't it? Up until yesterday, that's how it seemed to me.
"Bloody hell - the thieving bastards!" was my reaction when Mrs S proudly presented her newly-negotiated £400 saving on our leccy bill. By plugging some details into a price comparison website, she'd come up with a suite of electricity providers that could chop a third off our bill!
As Mrs S points out, four hundred quid is the price of a romantic weekend away. This is more than a simple saving on administering our account more effectively.
It's a classic case of "if you don't ask, you don't get". No -actually, now I come to think of it, it's a case of robbing apathetic (yes, that's me) and vulnerable customers.
I'm getting her indoors on the case of all our other bills. Good lord, by this time next week, she's going to be eyeing up a cruise in the Bahamas or something!
Now if that's got you mad, then take a few deep breaths before you read on.
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Drive a hard bargain with the market makers
Now I'm not talking about stockbroker commissions here - which incidentally can be avoided, or drastically reduced if you shop around. I'm not even talking about unit trust fees and commissions.
Today I'm talking about how market makers' fees can skin you alive. They can be a life-threatening cost when it comes to trading small stocks. We're talking about fees of up to 20% or 30% a pop.
Market makers are the guys that deal in shares (the stockbroker is your agent who picks them up for you). They earn their fees from the 'spread' between the buy and sell price.
Thankfully, a lot has changed in the lastten or 15 years, and for most stocks, your broker deals directly in the market - there's no need for these market makers. And so for large, liquid stocks, the spread between buy and sell price is negligible. But for smaller stocks, you need to watch out. A spread of between 10% and 30% is pretty common. We need to pare back these charges.
What goes for utilities goes equally for stocks. If you don't ask for a good price, you won't get one.
First of all, you need to know what the spread is before you enter the trade. You can find that out by looking at any number of the free stock quote websites; or else just ask your broker.
Now, if the spread is large (more than, say 5% or 10%), then you'll need to get your broker to really earn his commission.
Say a stock is quoted 50-60 (ie they'll buy them from you at 50p and sell to you at 60p), then the idea here is to get a price 'inside the spread'. I'd say to my broker, I'm not paying anymore than 58p (or if I was selling, I'd say I want at least 52p).
This is where you'll start to see the benefits of having a decent broker. A good broker will phone around the market makers and get you a price 'inside the market'.
Many of the discount brokerages won't do the work necessary. If you're dealing in stocks with large spreads, you may well find that you save money by paying a higher stockbroker fee to get a better deal on the market maker's price.
Think about it. What's most important, saving 1% on a cheap broker, or 5% or 10% on market maker spreads?
If necessary (and this is what I do) get a couple of brokers. One for Aim stocks and small to mid-caps, where you need the broker to make a friendly call to get you a good price. And then another for larger stocks where the spreads are negligible and all you're interested in is a cheap commission.
I'm afraid I can't recommend a broker here. But a good place to start is on MoneyWeek's share dealing comparison site. And I've seen plenty of discussion forums online debating who the good guys are.
So do your homework and if you can't get a decent price, then you may well be better off not dealing in that stock at all.
We can't afford to hand away 30% of our profits before we've even started!
Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Theo Casey. The Right Side is issued by MoneyWeek Ltd. MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798.https://www.fsa.gov.uk/register/home.do
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Bengt graduated from Reading University in 1994 and followed up with a master's degree in business economics.
He started stock market investing at the age of 13, and this eventually led to a job in the City of London in 1995. He started on a bond desk at Cantor Fitzgerald and ended up running a desk at stockbroker's Cazenove.
Bengt left the City in 2000 to start up his own import and beauty products business which he still runs today.
