Execution-only sharedealing services allow you to buy and sell shares or invest in funds without taking any advice. As a result, it is usually a cheaper option than using discretionary or even advisory services, but you need to have the confidence to make up your own mind about where to invest.

Paul Stallard, private client manager at Hargreaves Lansdown, explains, ‘The role of an execution-only stockbroker is to carry out the instructions of the client. It is our job to execute our clients’ “buy” or “sell” instructions in a timely manner and at the most advantageous price for the client.’

Also known as “discount brokers”, most providers of this type of service offer telephone access. Some execution-only stockbrokers also provide postal services, but the advent of the internet has been the real catalyst in this area, creating a service for investors who want to trade quickly, cheaply and efficiently as seldom or as often as they like.

For instance, the What Investment website allows users to set up an online portfolio through Trustnet. You can check it and complete trades through your execution-only broker online at any time, and you have the option to receive email alerts on chosen topics. Users can track investments in unit trusts, OEICs, investment trusts, alternatives, equities, gilts, warrants, cash accounts and many other types of asset. Visit www.whatinvestment.co.uk and click on “Portfolio” in the left-hand column for more information. Also, see the box on page 40 for more general information about online execution-only services.

Investor profile

As an execution-only service doesn’t involve advice, it tends to attract more-experienced investors – those who feel confident enough to buy and sell shares of their own volition. However, that is not to say that inexperienced investors shouldn’t consider this option. For a start, it can be an ideal route for investing in funds. If you have a strong idea of the sector you wish to invest in and the type of return you want, execution-only could be a suitable option, if you’re prepared to do a little research.

You could even open an ISA, PEP or SIPP account and invest in your chosen stocks or funds via an execution-only service, cutting down on costs and saving on tax at the same time. Trading frequency is not a problem either – you could be buying and selling several times a day or several times a year and there will still be room for you among the many execution-only services currently available.

Angus Rigby, chief executive officer at TD Waterhouse, says, ‘Frequency of trading varies widely between our customers. Active traders may buy and sell dozens of times a day. Buy-and-hold investors may only trade a few times a year. Looking at London-based investors with a portfolio of around £20,000, for example, we found that they traded, on average, ten to 15 times a year in the past couple of years.’

Stallard adds, ‘A hard core of our clients are active traders, although we have a growing number who can only be described as “equity investors” – as opposed to equity traders. Equity investors tend to take the medium- to long-term view of equity investments.’

Get informed

Organisations are rapidly addressing the needs of their more information-hungry clients too. Although he points out that execution-only means that advice cannot and will not be offered, Mark Taylor, sharedealing product manager at First Direct, highlights the extensive market research tools and comprehensive news and company information database available through its website.

Salim Sebbata, director of UK retail at E*Trade, adds, ‘Our trading platform is designed to provide a wide range of research, online education, portfolio allocation and charting features to help investors make suitable investment decisions.’

In addition, some brokers allow you to set up a fantasy portfolio for some practice before you invest real money. For instance, Saga Share Direct (SSD) offers a Fantasy Share Dealing game that aims to educate potential investors about the excitement and potential pitfalls of stock market investing, and offers the best overall investor a £1,000 cash prize.

Once you feel ready to swap the virtual matchsticks for cold hard cash, though, the amount of money invested is down to the client, says Stallard: ‘It can vary considerably, depending on what the client can afford to save, what they are trying to achieve or, of course, what they are prepared to lose.

‘Someone investing in shares for the first time is likely to be hesitant and somewhat risk averse about the whole process, so their investment may be minimal – say £1,000. Some clients, who trade within the annual ISA limits, can only currently invest a maximum of £7,000 per year anyway, but that may be sufficient for them. On the other hand, a client who has built a considerable portfolio over a number of years – or an active trader – may buy and sell equities with much larger amounts of money.’

Fees and charges

Most discount brokerage services, including E*Trade, First Direct and TD Waterhouse, don’t require a minimum amount to trade, so technically you can start small. But be wary – once the charges are taken into account you may find a small trade becomes practically worthless, so find out whether your discount broker charges a flat rate or a percentage of each trade.

Rigby says, ‘TD Waterhouse has no minimum account size or minimum trade size. Investors can invest any amount they choose, but obviously commission charges will be a more significant cost on very small trades.’

According to Sebbata of E*Trade, online execution-only services have had a positive effect on this aspect of trading. ‘With our service, given that commissions are flat, investors don’t have to worry about how fees might be eating away at their investible assets,’ he says. ‘In the very recent past, it wasn’t uncommon for full-service brokerages to charge around 50 basis points. For a single trade of £10,000, that’s £50! Online brokerages have really levelled the playing field for ordinary investors.’

You will often find one level of charges for active traders and another for those that trade less frequently. It is usually the case that the more active you are, the less you pay per trade. Hargreaves Lansdown, for example, offers four different sets of charges, depending on trading frequency and the route you choose – online or telephone. Most services make a charge per trade, as well as some kind of administration fee, which could be on a monthly, quarterly or yearly basis.

Product portfolio

Most brokers offer access to UK and even international markets. However, many have also moved into more niche areas, such as spread betting, contracts for difference (CFDs) and covered warrants. Rigby points out that such investors tend to use these instruments to trade cost effectively by reducing the effects of capital gains tax and stamp duty, but also to access investments not traditionally available to retail investors.

Some discount brokers also offer an account for any uninvested funds; for example SSD’s interest-bearing cash account is guaranteed at 1.5 per cent below Barclays Bank base rate. Rigby adds, ‘We offer a high-interest savings account that can be linked to a trading account to ensure any uninvested cash is earning a competitive rate of interest while remaining instantly accessible for trading.’

Whether you start off slowly with a fantasy sharedealing account or jump in with both feet and a large chunk of savings to invest, execution-only sharedealing could provide the freedom – and the financial rewards – you’ve been looking for.

Tech the high road

Trading with share certificates used to be the norm for private investors. However, these days shares tend to be held electronically in nominee accounts, as Paul Stallard, private client manager at Hargreaves Lansdown, explains: ‘The nominee companies, more often than not, are owned by the client’s stockbroker. This means they do not have to find somewhere secure to keep their certificates, and generally the whole process of managing a client’s shares is a lot more efficient from everyone’s point of view.’

Some brokerages, Hargreaves Lansdown being one, still offer a dedicated service for those wishing to trade in certificates, but it is now largely seen as an outdated way of trading. In fact, Mark Taylor, sharedealing product manager at First Direct, concludes that the speed and efficiency gained by going online has allowed financial institutions to lower the overall cost of trading.

This article is from the August 2007 issue of What Investment.