Several years after the dot.com boom and day-trading scene of the late 90s, online share dealing is a well-established feature of the financial landscape. Indeed, if you want an execution-only service there is little reason to look elsewhere, as the online deals beat the others out of sight in terms of cost and speed.

You can go online and deal for a flat rate of £7 to £15, as well as accessing market information and using wrappers such as individual savings accounts (ISAs) and self-invested personal pensions (SIPPs). And the range of assets that can be invested in has increased since the early days.

As well as all shares listed on the FT All-Share index and the Alternative Investment Market (AIM), investors can deal in foreign equities, fixed-interest stocks, covered warrants and contracts for difference (CFDs), and can even try spread-betting.

There is also increasing sophistication in the array of trading tools provided. For instance stop-loss orders – where a holding is sold automatically when the share price falls a certain amount – are now standard.

But, while there are certain basic features common to all online share-dealing services, many brokers now offer a two-tier structure, running ordinary trading accounts alongside frequent-trader accounts. On the latter, a lower flat rate for deals is charged if a certain amount of trading is done during a fixed period, usually three months.

Trading in ten?

How quickly you can get started depends on your choice of online broker. Some allow you to sign up for their services online, while others ask you to request or download forms and apply by post. Comdirect, for instance, claims “apply online and you could be up and trading in just ten minutes”. However, this depends on your passing online credit and identity checks. Once registered you are limited to the 15,000 (approximately £9,000) limit allowed within money-laundering legislation until you receive and return an address verification code. Full trading can take up to four days to set up.

In contrast, The Share Centre asks that you either download or request an application form and post it. According to sales manager Ian Benning: “On the day we receive the application and the checks are done we send out confirmation and reference numbers so people can begin trading. This process will be about three to four days, although we have done this more quickly at times.”

Barclays Stockbrokers allows online registration, for which applicants will need to have their National Insurance number, current and previous addresses and bank details to hand. If the submission passes money-laundering checks, you can gain access to the research centre and trade the following day. However, for security reasons Barclays still requires a physical copy of the application form to be signed and sent in the post. If this is not received within 28 days, the broker will put a stop on the account.

A note of caution

But before you rush to sign up, take a reality check. Remember that online brokers offer execution-only services, so you really have to know what you want and why, because no matter how much information they provide, they will not give advice.

Remember that cyberspace includes a huge, unregulated pool of suppliers. Not everyone is who they say they are. There’s a whole host of websites offering you online share dealing. Some are run by well-known and respected names, others are not. If you are in any doubt contact the Financial Services Authority (FSA)to see if the firm is authorised to take your cash. You can use the Firm Check service on the FSA website, www.fsa.gov.uk, or call its Consumer Helpline on 0845 606 1234.

Another thing to realise is that your shares will be held electronically in a nominee service. This speeds up the whole process, but as you do not hold the share certificate you are obliged to sell your holding through the broker you bought it from, unless you transfer the holding to another broker.

Furthermore your name is not on the company’s register of shareholders and you may miss out on, or face a delay in receiving, company information such as the annual report and accounts. However, some online brokers – for example Comdirect – offer free company report services.

True costs

It is easy to be attracted to a service just because the stockbroker offers a very low flat rate on deals. But look out for other charges, such as an annual fee or charge for transferring out of the brokerage. The Share Centre’s FastTrack frequent-dealer account, for instance, offers a low flat rate of £7.50 per deal, but attracts an administration charge of £7.50 a month or £75 a year. In comparison, Hoodless Brennan offers a month’s commission-free dealing before you switch to its low current rate of £7 per deal – with no annual administration charge. Remember, however, to check what you get with an annual charge and what you don’t get – and may have to pay for – where one is not levied.

Another thing to watch out for is an ‘inactivity fee’. TD Waterhouse charges £10 plus VAT if there is no activity in an account in any one quarter. Barclays Stockbrokers’ MarketMaster account charges a quarterly administration charge of £9 plus VAT, waived if a deal is made, plus an additional £25 plus VAT per quarter for your overseas equity portfolio, again waived if a deal is made.

Range of assets

Online stockbrokers can now be used for much more than just trading UK equities; foreign equity trading is part of most services. However, in some cases this will be limited to certain US and European companies listed in the London Stock Exchange’s International Retail Service (IRS). This includes 350 blue-chip equities quoted in the US and on major European markets.

That said, American Express’s share-dealing service offers trading in US equities traded on the New York Stock Exchange, Nasdaq and AMEX, as well as securities traded on the major exchanges in Germany, Holland, France, Stockholm and Italy. Comdirect boasts online trading in 18 North American and European markets.

Some sites offer trading in gilts and bonds, investment trusts, unit trusts and OEICs, usually through a fund supermarket offering discounted initial charges on between 250 and 800 funds. More esoteric instruments, such as covered warrants and CFDs, are also offered by some brokerages.

Bear in mind what happens to cash generated through trading. All brokers will place your cash in a holding account which will earn interest, but the rates offered vary considerably. If you think you may hold spare cash in your account for weeks or months at a time, the rates are worth investigating, as they could have a considerable impact on your profits. For example, E*Trade’s Classic account offers zero interest on sums up to £9,999, 0.1 per cent on balances of £10,000 to £49,999, and 1.5 per cent on sums above that. Interest is calculated daily and credited to accounts in March and September. In comparison, Halifax Share Dealing offers 3 per cent on balances of £1 or more, and 4 per cent on sums of £50,000 and more.

Investment wrappers

Most online brokers allow investors to buy and sell shares within a number of wrappers. Most offer tax-free wrappers such as ISAs and personal equity plan (PEP) transfers, and some have added SIPPs to their ranges. In the case of Comdirect and The Share Centre, the new Child Trust Funds are also on the menu. There is a separate set of charges for these wrappers on top of the normal dealing costs.

Many of the online brokers now offer tools that allow sophisticated strategies. For instance, Barclays Stockbrokers, Comdirect and The Share Centre offer a trailing stop-loss facility where the stop-loss limit tracks upward with the share price. The Share Centre offers a further ‘tweak’ with its Safeguard service – this deactivates your stop-loss trigger when the spread between the buy and sell prices is greater than a predetermined range.

Another element to take into account is how your order is handled and at what price you may trade. For instance, Barclays offers its Stockbrokers Price Improver, which automatically links to nine major market makers, scans the market and identifies the most competitive price available for the deal. In some cases, though, your order may be aggregated with others. This is the case with Halifax’s ShareBuilder account and on The Share Centre’s cheaper dealing accounts. This may or may not be to your advantage, and your choice will depend on whether you can tolerate such loss of control.

Look beyond the headline dealing rate and determine what is charged for and what is not, as well as the range of assets you may invest in and the wrappers in which they may be invested as well as exactly how your order will be handled.

Most brokers offer a telephone helpline as well as e-mail contact. It may be worth calling up and seeing how long it takes for them to respond – a clue as to how good their service standards are overall.