Share-building plans enable investors to buy shares for as little as £1.50 per trade. But are they worth it? Harvey Jones finds out.

We all know online stockbroker sites have made trading shares both easy and cheap, but £1.50 a trade? That’s dirt cheap. But plenty of sites let you deal for this rock-bottom rate, provided you invest a regular monthly sum.

TD Waterhouse, The Share Centre, Interactive Investor, Motley Fool, Halifax Share Dealing, Selftrade and others offer low-cost monthly trading, and although their offerings vary slightly, the underlying principle is similar.
It’s all quite simple. All you do is agree to invest a regular amount, typically anything between £10 and £200 a month, in a company’s share (or sometimes a fund).

The broker scoops up your cash and that of other investors in the same stock, and executes the deal in one batch trade on the same day each month. Because its dealing costs are vastly cheaper than processing each trade individually, it can pass on the savings in the form of its tiny dealing fee.

This allows investors to trade smaller sums cost effectively. If you invest, say, £200, a flat-rate dealing fee of £12.50 eats up a big chunk of your capital, and works out as a costly initial charge of 6.25 per cent. By comparison, a £1.50 dealing fee costs just 0.75 per cent of the money traded. In both cases, you also have to pay 0.5 per cent stamp duty on top.

Most sites don’t have any additional charges, such as administration fees, but it is always worth checking before you sign up. While there are big savings to be made, as you may already have suspected, there are some practical drawbacks, and this arrangement won’t suit everybody.

Taking baby steps
Low-cost monthly share dealing certainly isn’t right for active and aggressive traders, but it is perfect for small-time investors who want to edge into a stock, little by little, and hold it for the long term. If you want to invest, say, £1,000 in Vodafone, but haven’t got the cash to hand, you can steadily build up your position by investing £100 a month for 10 months.

Regular monthly share dealing is a great first step for investors just starting out, says Ian Benning, product development manager at The Share Centre. ‘By drip feeding money into stock markets, you are limiting your exposure to a sudden crash, which helps build confidence among people who otherwise wouldn’t dare invest in stocks and shares.’

The Share Centre’s regular investment service undercuts many of its rivals by charging a flat £1 fee for trades of £10 to £200 per month, rising to a percentage commission of 0.5 per cent if you invest more than £200. This is cheaper than the 1 per cent commission it charges on one-off trades, which carry a minimum £7.50 fee (£2.50 with a batch trade).

Most regular share dealing plans allow you to split your contribution between different stocks, but charge a dealing fee for each stock. So if you invest, say, £50 in Tesco, £50 in GlaxoSmithKline and £50 in Whitbread, and pay £1.50 on each transaction, your monthly charges will total £4.50.

You must also pay your site’s standard dealing fee when you sell any of your stock, so shop around to see which sites offer the best rates.

Sites typically allow you to change the size of your monthly contribution, switch to a different stock and trade money you have previously invested.

Andy Raby, head of customer services at Halifax Share Dealing, says it aims to make its plan as flexible as possible. ‘We don’t set any upper or lower limit on how much you can invest, and you can trade any sum you choose, up to four times a month. You can change your order or cancel it at any time, without penalty, or pay money without investing it, letting it accrue until you are ready to invest. All for a flat £1.50 per trade.’

Halifax also lets you make one-off trades, so you could invest £20,000 for a dealing fee of just £1.50. You are also free to trade in any UK stock, including smaller companies listed on AIM.

Many investors use regular share plans to save for specific goals, explains Raby. ‘People often name their plans – for example, car fund, retirement fund, holiday fund or Christmas fund.’

Time in the market
As any investment adviser will tell you, investing in stocks and shares for a specific purpose over a set time frame is risky, because a sudden crash could destroy all your plans. It makes more sense to use these vehicles as a long-term savings plan, over at least five or ten years, to help you overcome any short-term volatility.

Raby warns that active traders will find regular share plans limiting. ‘The process is entirely automated. We don’t apply any discretion over when we actually buy the stock in question. We don’t time the purchase, so you won’t necessarily buy at the best price.’

Regular share dealing is for investors rather than traders, says David Kuo, investment specialist at Motley Fool. ‘Many investors prefer to time their purchase to buy a share when it hits an attractive price, but you can’t do that with a regular monthly service. Buying at the same time each month could work in your favour, but it could also work against you, and is completely out of your control.’

An added benefit
But you do benefit from pound-cost averaging. By investing a set amount regularly, you buy fewer shares in a month when prices are high but more when they are low. It actually suits you for shares to fall in price, as you can buy more at the lower price, providing they bounce back by the time you wish to cash in your investment.

Investing monthly over the longer term does instill discipline, Kuo advises. ‘You have to choose a good, solid stock, invest in it for the long term and not be distracted by any short-term price fluctuations or get-rich-quick schemes.’

If you are investing for the long term, you should remember to diversify by diverting your monthly investments into different stocks, otherwise you will be too heavily exposed to the fortunes of just one company, notes Rebecca O’Keeffe, head of investment at online stockbroker and fund supermarket Interactive Investor. ‘Regular share plans such as our Portfolio Builder make it more cost effective to invest in a variety of companies or sectors, which is a good way to spread your risk. The volatility in the market over the past 12 months may put off some investors, but making regular payments can remove some of the risk.’

As you would expect, you can trade inside a regular share account using your ISA allowance, while a tax-efficient Child Trust Fund (CTF) is ideal, because you can invest small, regular sums for up to 18 years.

Many stockbrokers offer CTFs, so again, hunt around for the plan with the lowest charges and greatest flexibility. They should also help you transfer your existing holdings into your new CTF.

If you want to invest regularly but don’t fancy investing in individual company shares, many brokers allow you to invest in funds every month instead. The Share Centre’s Platinum 120 account, for example, waives all dealing commission and initial charges – you only pay the fund manager’s annual management charge, typically around 1.5 per cent.

Investing for just £1.50 a month is as cheap as share dealing gets, and the flexibility of these schemes means they can’t really be faulted. Compare sites carefully to find which is the best deal for you.