Harvey Jones explains how online execution-only dealing services have transformed they way private investors buy and sell shares.

When online execution-only stockbroking sites first opened to the public it marked a revolution in investing. Under the old system, anybody wanting to trade shares first had to speak to a stockbroker, who would chat amiably before placing the trade on your behalf, and charge a heavy price for the privilege. It was strictly a niche pursuit, for the well-heeled.

Online stockbroking sites have transformed that, allowing ordinary people to log on whenever they want to, without speaking to a broker, and buy and sell shares for around a tenner. This has opened the world of share dealing to, well, almost anybody who is interested and has a little cash to spare. It also introduced investors to a whizzy new world of financial jargon, including ‘real-time prices’, ‘stop-losses’, ‘limit orders’ and ‘batch deals’.

Technological boost
Execution-only online stockbroking came of age during the technology boom, when spiralling dot-com valuations sucked in a flood of investors, who were astonished to discover just how easy it was to make fast money from buying shares. However, after the bubble burst in March 2000, they were even more astonished to discover how quickly they could lose money.

The technology sector has never quite recovered, but the online stockbroking model has proved to be more resilient, having now survived its second meltdown. There have been one or two victims, notably Hoodless Brennan, which closed its consumer online share dealing site in June and sold its 45,000 accounts to rival stockbroker TD Waterhouse (although it will continue to offer advisory and derivatives services, plus corporate broking).

Hoodless Brennan had spearheaded rock bottom dealing rates, charging as little as £8 for UK trades and £6.50 for frequent traders (rates TD Waterhouse will honour for 12 months), but it fell victim to the decline in share trading after the recent market collapse.

Following the cycle
Angus Rigby, chief executive at TD Waterhouse, says execution-only investors tend to follow the investment cycle, trading heavily when markets are rising and losing interest when they plummet. ‘After the dot-com bubble, transactions remained low, as investors ploughed into property. Interest revived during the “dash for trash” between March and May, when banking stocks were hugely popular, but now things have gone quieter again.’

However, he argues that now is a good time to register and get used to trading. ‘Markets are quiet, but if you wait until they start rising, you will have missed most of the action. Shares are starting from a low base, and have plenty of scope to grow once the recovery comes.’ And with rates for cash on deposit so low, many savers could also get a better return by investing in solid blue-chip companies paying strong dividends.

Rigby says many execution-only customers are refugees from the advisory sector. ‘They were paying costly fees for advice and still got clobbered by the crash. Nobody can get it right all the time, and many would rather pay lower fees and make their own mistakes.’

A choice of charging structures
There are dozens of online stockbroking sites to choose from, and you should shop around to find the right one for you. Access is genuinely instant – you can often set up your account and begin trading on the same day.

Most people start by comparing fees. Some sites charge a percentage of the amount you trade, others charge a flat fee. The Share Centre charges one per cent on trades, with a minimum of just £7.50 for real-time share dealing. This works well for people dealing relatively small amounts, say between £500 and £1,000, which keeps your dealing fee under £10, plus stamp duty.

If you plan to make larger transactions, look for a site with a low flat fee, such as Interactive Investor International and Motley Fool, which both charge £10 a trade for UK stocks. Selftrade and TD Waterhouse charge a flat £12.50 for a standard trade, with reduced rates for regular traders (although ‘frequent traders’ on Selftrade must make at least 100 trades per quarter).

Others charge a higher fee the bigger your trade. Hargreaves Lansdown’s Vantage service’s charges start at £9.95, but only for deals under £500. You pay £14.95 up to £2,000, £19.95 up to £4,000 and a maximum £29.95 above £20,000.

You also typically pay more to trade by phone. Selftrade charges its flat £12.50 fee, but the Halifax online fee of £11.95 rises to £15 on the phone, while TD Waterhouse’s standard account charges £20 for telephone trades under £1,000, £25 up to £2,000, £35 up to £4,000 and £100 above £20,000. Ouch!

Getting the right fit
Price comparison sites, such as Moneysupermarket.com, allow you to compare trading and administration charges at dozens of different sites. Many sites offer accounts charging just £1.50 per trade, if you buy regular amounts of a stock on a set date every month.

An online stockbroker’s worst nightmare is somebody who opens an account then only trades once or twice a year, if at all. The broker still has to service the account, but gets no dealing fees. Some sites are now targeting these clients with quarterly or annual subscription charges, so make sure you include those in your calculations.

But fees aren’t everything, you should look at the overall package, says Ian Benning, product development manager at The Share Centre. ‘Ask for an information pack. How quickly does it come? Can you get through on the phone? What kind of service do you get when you speak to somebody?’

To help guide your stock picks, most sites offer stacks of market and company news and reports, broker research and views, performance charts and user message boards. ‘You can get much of this free online, but it is much more convenient to have the majority of your research through the same site,’ Benning adds.

The Share Centre is rare in allowing execution-only clients to speak to a stockbroker free of charge. “If you’re interested in a stock, you can call up to discuss whether we think it’s a buy, sell or hold, and explain why,” Benning says.

However, if it’s a full-blown advisory service that you want, you should look to providers such as Killik & Co, but expect to pay a minimum £30 per trade.

Trading priorities
Your choice of account will also depend on what you want to trade, says Stephen Barber, head of research at Selftrade. ‘UK equities are the most popular service, but many sites also run ISA accounts and SIPPs, and sell unit trusts, OEICs, investment trusts, exchange-traded funds (ETFs), corporate bonds, gilts and covered warrants.’

If you want to trade more exotic instruments, such as contracts for difference (CFDs) or take a punt on spread betting, you might need to go to a specialist such as IG Index or Selftrade.

Barber says you should consider whether you want other services, such as the ability to set stop-losses, which trigger a sale once a stock falls below a certain level, and limit orders, an order to buy or sell a security if it hits a set price.

Before you start trading with real money, it might first be worth setting up a practice account, to build your confidence by trading virtual shares at no risk. But don’t get carried away with any early success. ‘You always seem to do better with imaginary shares than real ones,’ Barber observes.

Investors have endured a turbulent decade since they started using online stockbroking sites. Those heady revolutionary days of the tech boom have yet to be repeated, and perhaps never will. But if you wait until markets are buzzing again before setting up your account, you may well miss the next upswing.