If you're looking for an online broker to trade UK stocks, you may feel spoiled for choice. But despite having all these options available, many investors still use brokers who are not suited to their needs and are paying too high a price, or getting inferior service as a result. Here are some of the main points to consider when deciding where to open an account.
Compare all costs
Investors tend to focus on dealing commissions when comparing brokers, perhaps because firms advertise these more clearly than other fees. Standard dealing commissions for UK shares are typically between £5 a share and £15 a share, with some firms offering lower rates if you place a certain number of trades every month or quarter. However, while important, trading costs are only part of the package.
Many brokers also charge account administration fees. These may be waived if you trade a minimum number of times (in which case they are usually known as “inactivity” fees). These vary from nonexistent to over £100 per year for standard dealing accounts, with some fees for individual savings accounts (Isas) and self-invested personal pensions (Sipps) being higher.
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Most brokers also charge a foreign exchange (forex) commission when converting from sterling to foreign currencies. This can be as high as 2%. This will normally be most relevant to investors buying overseas shares, but also applies if you buy one of a number of London-listed shares and funds that trade in dollars or euros. Some brokers also charge for processing dividends or handling corporate actions, such as rights issues, although this is less common.
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Lastly, you should be aware of any other fees, such as account opening or closing fees (which are rare), and fees for transferring stocks to another broker. This means it's vital to understand your own trading patterns and how different fees will affect you. For example, if you only trade three times a year, you may be better off with a firm that charges a higher dealing commission and no inactivity fees.
A very frequent trader with a large account may benefit from lower dealing costs, even if the broker charges a relatively large annual fee.
Consider smaller firms
Cost isn't everything. There are substantial differences between the quality of service offered by different brokers. Many investors assume that big, high-profile firms will be better, but this isn't necessarily so. Smaller, independent brokers are sometimes more helpful and flexible, because they are more focused on meeting your needs.
Don't be put off smaller firms in the belief that they are less safe than larger ones. The Financial Services Compensation Scheme applies equally to brokers of all sizes and will pay compensation of up to £85,000 per client if a broker collapses and your shares or money are missing due to fraud or negligence.
Do ensure that any UK broker you deal with is authorised and regulated by the FCA. Never deal with unregulated brokers or any firm that cold calls you these are invariably scams.
Do you need specialist services?
You should also consider whether a broker offers any specialist services you may find useful. For example, many investors look for a broker who can automatically reinvest dividends at a lower-than-usual rate.
Alternatively, many brokers let you make regular investments on a specific dealing day for a very low fee. Both are good ways of keeping down costs while building your portfolio and are widely offered by larger brokers.
Some investors still prefer to hold shares in their own name rather than in the name of their broker's nominee company, which is the usual way in which shares are held by online brokers today.
This can be done by having a personal CREST account (CREST is the name of the UK's system used for settling trades in electronic form). However, there are a very limited number of online brokers who offer this to new clients: Stocktrade is the main one.
Very active traders may want to consider a broker who offers direct market access (DMA). Most brokers place your trade through market-makers known as retail service providers. This involves asking one or more intermediaries who trade directly on the stock exchange to quote a price for the trade. You then get around 15 seconds to decide whether to accept that or not.
With DMA, your order is placed directly onto the stock exchange's order book. Effectively, this means you offer a price and see if anybody will meet you, rather than accepting a price that somebody offers you. Most investors don't need this, but for very frequent traders the extra control can be useful.
Get value for money
The most important step is to be clear about exactly what you must have. Don't be tempted to pay for services you don't need. Many brokers offer glossy websites full of market data and information to try to win clients, but much of this is available free elsewhere.
Remember that keeping costs down is a key part of successful investing. That doesn't mean you must go with the cheapest broker good customer service and a reliable platform are worth a lot. But shopping around to be sure that you are getting value for money could be almost as important as the stocks you decide to buy once your account is open.
