When MoneyWeek published its first online trading guide more than a decade ago, the whole idea of investing over the internet was still relatively unfamilar to many of our readers. Online brokers had arrived in the UK before the turn of the millennium, but the majority of stock trades were still done over the phone. Looking back at those old issues, we see plenty of articles explaining the whole concept of an online stockbroker, how it works and how to place your first online trade – advice that now seems very quaint, given how much has changed since then. Meaningful numbers of trades are still placed by phone – especially in areas such as bonds, where brokers have been slower to develop online-execution capability. But the internet is now the standard way to invest for most of us.
However, there are still plenty of areas where perhaps we’ve only begun to see the impact on how we manage our money. One example is exchange-traded products (ETPs). While these instruments slightly predate online trading – the first ETPs were launched in 1993, the first online dealing service in America opened in 1994 – their rise probably owes a great deal to the rapid growth in online trading. ETPs offer low fees, access to a huge range of assets and markets, and the ability to trade throughout the day, making them well suited to a world where we want to express our investment views as cheaply and easily as possible.
While there are some concerns about the risks of ETPs in areas where they are not appropriate — we’ve often written in MoneyWeek about the potential risks they could create in illiquid markets such as high-yield bonds – overall, they have been a huge benefit for both long-term investors and short-term traders. There’s still plenty of room for them to grow in popularity with individuals: in the US, private investors account for around half of ETP trades, compared with around a fifth in Europe.
Another important shift is in private investors’ access to high-quality data to help drive their investing decisions. Online services such as SharePad and Stockopedia make in-depth financial information available from anywhere through powerful, easy-to-use websites. Until relatively recently, data and screening tools of this sophistication were only available through dedicated desktop software. Now you can access them on the go through any modern browser.
For many people, “on the go” means through smartphones and tablets: the increasing popularity of these gadgets has led to a rise in the number of trades being conducted through apps. With many people abandoning the idea of having a desktop or laptop at home and turning to mobile devices for all their online needs, that trend seems set to continue. So we’re seeing a steady increase in the number of apps for managing your money on iPads, iPhones and Android.
Many of these apps are still very basic (unfortunately that includes many of the stockbrokers’ own efforts at releasing an app in order to avoid seeming behind the times). But there are now a number of well-designed tools that are either essential additions to your collection (every investor should have the free Bloomberg app), or well worth keeping an eye on.
One of the biggest concerns when choosing a stockbroker, spread-betting firm, or any other type of trading service, is the safety of your money. UK-regulated brokers are required to keep the assets of their retail clients separate from their own assets. This means that if the firm goes bust, those assets are not available to creditors. Unfortunately, asset segregation doesn’t always work: it’s obviously vulnerable to fraud, but even where there’s no deliberate wrongdoing, it’s common for assets or money to be missing or incorrectly recorded when a firm goes bust (such collapses are usually quite chaotic).
So that means it’s worth thinking about the safety of your account when choosing a broker. However, many people take this to extremes, sticking with the biggest brokerages — often those owned by large banks — even if their services and fees aren’t very competitive. Yet all UK-regulated stockbrokers are covered by the Financial Services Compensation Scheme (FSCS), which pays compensation of up to £50,000 per individual per firm if a broker fails and assets or money are missing. This provides some protection against potential losses if a smaller broker collapses (which is uncommon, but happens occasionally).
However, it is important to keep in mind that this only applies to fully UK-regulated brokers. Firms that are based in Europe and “passport” into Britain under European Union rules will be covered by their local regulator and investor compensation scheme, which typically protects less than the FSCS (€20,000 is the standard). Nor will the FSCS compensate you for losses caused by unregulated firms based in the UK or elsewhere.