share trading, share dealing costs, Tim Bennett

Five ways to cut the cost of investing

29.06.2007

by Tim Bennett

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This genius investor does dizzying levels of research to uncover...Half Price Shares!

Some motorists will enthusiastically haggle down the price of a new car, but then get fleeced on mundane extras, such as insurance and servicing. It’s the same with investors; in the excitement of designing a grand investment strategy, they forget to keep an eye on the day-to-day costs of investing, which can have a hefty impact on your portfolio. The following tips are easy to implement and could save you serious money over the long term.

Share trading: keep dealing costs down

There are three types of service a UK broker can offer and the cost varies considerably according to which one you pick. Not all brokers offer every service, so shop around to ensure you get what you want – and not what the broker wants to sell you. Cheapest is the ‘execution-only’ service, usually available over the internet. As the name suggests, you are not paying for advice or portfolio management, just the cost of executing your orders – this can range from £6.95 (for regular deals at E*trade) to £15 per order. But prices often vary depending on the frequency of trading, so check the small print and don’t just take the first deal you spot. Sites such www.fool.co.uk allow you to compare costs.

More costly is the advisory service where you are given recommendations, or the ‘discretionary’ offering, where you effectively say ‘take my money and invest it for me for a large fee’. The latter option is really aimed at the very wealthy, while the former is something of a throwback to the days when timely stock-market information wasn’t as easy for the small investor to come by. There are now plenty of ways for individuals to get investment advice and share tips – so why pay a stockbroker for them? Finally, don’t demand share certificates as proof of ownership. All UK shares are now securely registered electronically within a system called Crest, and by asking for a certificate you just incur administration and custody charges levied for the deal.

Share trading: use your capital gains allowance

There are a few simple ways to avoid paying too much tax on share trades. If you’re fortunate enough to make capital gains during the fiscal year (the current one runs from 6 April 2007 to 5 April 2008), consider taking advantage of capital-gains tax concessions. It means that the first £9,200 of profit on any disposal is tax-free. Each person gets one allowance per tax year and it works on a ‘use it or lose it’ basis. So consider cashing in some investments each year to ensure the allowance isn’t wasted, but bear in mind that you should never allow your investment decisions to be driven solely by tax considerations. Another vital point to remember is that losses can be carried forward and used in subsequent years, so keep a careful note of them. If in doubt, an accountant or broker can help, or phone the tax office on 0845 900 0444.

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Share trading: use your Isa allowance

Individual savings accounts (Isas) are one of the most tax-efficient ways to invest. Using the ‘maxi-ISA’ you can buy up to £7,000 of shares per tax year and not pay any subsequent capital-gains tax on disposal, or more than the basic 10% rate of income tax on dividends received. Good news, indeed, but be aware of the catches. Firstly, this is another ‘use it or lose it’ deal, so you need to remember to use your allowance each year. Secondly, you will generally have to pay an Isa provider for running the account, so shop around.

Share trading: don’t trade too often

Trading too often or in very small amounts can seriously harm your wealth. A £200 purchase might be reduced by a fixed £9.95 commission and 0.5% stamp duty of 50p – that’s more than 5% of the initial investment gone. A £100 purchase would also be reduced by the same £9.95 and 10p stamp duty – that’s 10% gone. And that’s without factoring in another commission and the bid/offer spread (the difference between the buying price and the selling price) when it comes to selling up later.

Share trading: don’t try to time the market

Trying to time the equity market by buying in the dips and selling at the peaks isn’t easy – don’t forget Keynes’s maxim, “the market can remain irrational longer than you can remain solvent”. If you want to sleep at nights, drip-feed (on a monthly basis, for instance) an affordable amount into a broad range of shares (ideally using a tracker or exchange-traded fund) so that you reap the benefits of ‘pound cost averaging’. This way, you won’t throw all your money into the market as it’s about to fall off a cliff, and if shares do tumble, it just means you’ll get more units for your monthly sum. Research by US firm Edward Jones backs up this approach. Over the last 36 years the average annual return from equities was 7.6%. Anyone who missed the best 30 days in that period would have earned just 4.0%, and by missing the best 60 days – just two per year – you would actually have lost 0.2%.