[image 1] Execution-only share trading has survived the collapse of the technology boom to power ever upwards, with an extra 300,000 private investors setting up online accounts in the past 12 months. There are now 2.8 million share dealing accounts in total, according to research from The Share Centre. This suggests that Margaret Thatcher’s distant vision of a share-owning democracy really is starting to happen.

Yet most online traders aren’t particularly active. The total number of deals last year rose ten per cent to 8.6 million – but that works out at just three share trades per account. The once-trendy idea that Britons would turn into a mob of goggle-eyed day traders has been consigned to science fiction.

Something for everyone

Still, there is nothing wrong with setting up a share trading account to contain your portfolio of long-term holds and fine-tuning only occasionally. Whether you are a frenetic trader or an occasional dabbler, you have to find an execution-only service that matches your patterns of activity. Otherwise you could end up paying disproportionately high charges.

The good news is that trading charges have tumbled in recent years, thanks to the rise of the internet and the ensuing competition between scores of online stockbrokers. If you want the personal touch of chatting to your trusted stockbroker, you can still pay £40 or £50 per trade, but online you can generally do it for a tenner or less, particularly if you are a frequent trader.

Sharedealing sites have a number of charges, but the two key fees are trading charges and account administration charges. These admin charges may be imposed quarterly, half-yearly or annually, depending on the site, so make sure you are comparing like with like.

To keep costs down, regular traders should look for a site that offers the lowest dealing charges, even if that means paying slightly higher account administration fees. If you only plan to make one or two trades a year, higher dealing costs might be a price worth paying for lower management charges.

Many stockbroking services may give you a choice of trading rates to match your likely pattern of use. Regular traders can get rock-bottom rates. Barclays Stockbrokers, for example, offers a frequent trader account charging just £6.95 if you trade 11 times or more a month, or £7.95 if you do between six and ten trades. Less than five trades, and it is up to £12.

A range of charging options

If you prefer to trade by telephone, it can cost a lot more, particularly for larger trades. Barclays’ commission starts at £17.50 for trades under £1,000, then rises to £24 for trades up to £2,000, £36 for trades up to £4,000 and so on, reaching £70 for trades above £20,000.

Other sites don’t charge extra for telephone trading. Selftrade, for example, charges a flat online fee of £12.50 for all online and phone trades. Flat fees can work well for people trading larger amounts.

If you don’t expect to trade that often, watch out for inactivity fees. Barclays charge £12 a quarter, or £48 a year. Selftrade, by contrast, doesn’t charge any inactivity fees or annual fees. So, Barclays’ lower dealing fees makes it better for frequent traders, Selftrade for stock market dabblers.

Some sites charge more for international stocks and shares. Fool.co.uk, from Motley Fool, charges a £10 flat fee for UK trades and £17.50 for international equities. Many others do the same.

Regular investing

Direct equity investing has traditionally been out of bounds for people who trade small amounts often, because dealing charges can swallow up smaller sums. Several online brokers now get round this by offering low-cost monthly investment plans. For example, Halifax Sharebuilder allows you to buy a regular batch of shares each month for just £1.50 per trade – the minimum monthly investment is £20.

You can invest in any number of individual company shares, but don’t spread your cash too thinly, or those trading charges will add up. You are also free to change the amount you buy or scrap your plan without penalty. If you want to buy more shares in real time, you pay £11.95 per trade.

Fool.co.uk also offers low-cost monthly trading at £1.50 per trade, says Edward Bowsher, editor of Fool.co.uk: ‘We can keep the cost down because we only buy shares at set points during a week and can, therefore, aggregate sales and purchases. When investors sell the shares, they have to pay our normal fee of £10.’

He says this fits in with the egalitarian philosophy of share trading for all: ‘It allows people who wouldn’t consider themselves wealthy to invest directly in the stock market. So you could, for example, invest just £20 a month into Tesco shares while paying a commission of just £1.50.’

The Share Centre offers low-cost monthly trading at £2.50 a deal, with a £10 monthly minimum. It offers competitive trading charges, although they can be a little confusing (and hard to find on its website). Infrequent dealers trading small amounts can pay one per cent of the trade, with a minimum charge of £7.50. If you’re trading £1,000, you pay just £10. If you plan to trade regularly, or deal in large amounts, you can choose to pay a flat £7.50 fee plus an £80 annual subscription.

Most sites say that you can set up your account online within five to 10 minutes – some even boast two to three minutes – so it is simple as well.

No such thing as a free lunch

Don’t be distracted by sites promising free trading, These are typically introductory offers that expire after a month or two. They only make sense if you plan to be particularly active during that start-up period.

Decide whether you have the knowledge and confidence to make share trading decisions yourself, because you can’t blame anybody else if you squander your pot of cash. Most online investors are, by their very nature, happy to go it alone, says Guy Knight, sales and marketing director at The Share Centre: ‘But some still want help and guidance on their strategies, or the pros and cons of a specific investment. Free telephone investment advice for customers is as rare as hens’ teeth. We are one of the few brokers to offer this.’

Many sites offer general share information, including market commentary, hot stocks, hints on buying and selling, information on shareholder perks, top ten buys and sells, fund prices and factsheets, and general investment guides. And some provide portfolio management tools that allow you to analyse your holdings, check performance and build a balanced and diversified pot.

Most services offer handy facilities such as a stop-loss, which triggers a sale if one of your stocks heads alarmingly south, and will also offer email alerts, warning you of opportunities and threats.

Making the right choice

Before signing up to your execution-only broker, make sure it offers the investment choice you want. Do you simply want direct equities, or do you want investment funds as well? Some sites allow you to choose from a limited panel of funds; others, such as Hargreaves Lansdown, offer a full range of thousands of UK and international investment funds.

Or do you want the thrill of investing in more complex financial instruments, such as contracts for difference (CFDs) or financial spread betting? Some sites offer these services, some don’t.

Others, meanwhile, offer self-invested personal pension (SIPP) dealing accounts, nominee and certificated trading accounts or child trust funds.

Don’t forget the ISA

If you want to trade shares tax-efficiently, consider a self-select ISA. The best allow you to invest in thousands of UK and international equities, complex financial instruments, gilts, warrants and covered warrants, plus a choice of unit trust and corporate bond funds, all within your ISA wrapper.

‘You can attach a high-interest savings account to some trading accounts,’ says Angus Rigby, chief executive of broker TD Waterhouse. ‘This way, any uninvested cash is earning a competitive rate of interest while remaining instantly accessible for trading.’

Some sites also offer extended settlement and personal trading limits, allowing you to react instantly to market movements. ‘You can open a position without needing to wait for funds to be deposited and cleared first, giving absolute flexibility on trades 24 hours a day, seven days a week,’ he says. TD Waterhouse offers up to 20 days for online trades and 25 days for telephone trades.

And if taking the plunge by investing real money online makes you nervous, most sites let you do a dry run using a practice portfolio of play money, so you only lose ‘virtual’ cash. The downside is that any gains will also be virtual. And that simply isn’t as exciting as the real thing.

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