How to find the right stockbroker
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Associate Editor
David Stevenson Jul 03, 2009
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The FTSE 100 may be more than a third lower than its peak of two years ago, but the UK market has still managed to stage a 20%-plus rally over the last four months. That's led to a surge in trading volumes, particularly through 'execution only' stockbrokers (those that don't offer frills such as research or analysis, but just carry out your order as cheaply as possible). Online trading volumes were up 66% year-on-year in 2009's first quarter.
That should be good news for brokers. But some have struggled to cope with the extra demand and in several cases are upping commission rates to cover the higher expenses they're facing. After years of competition driving down costs, it looks as though share dealing may start to get more expensive for small investors.
For example, Hoodless Brennan – long a favourite with small investors for its low £8 standard dealing fee – has now sold its online share dealing business to larger rival TD Waterhouse. TD Waterhouse will match Hoodless Brennan customers' trading charges for at least a year, but after that charges are likely to rise.
Meanwhile, from this week Selftrade, one of the biggest online dealing services, is to charge clients a new £40 annual management fee – regardless of dealing frequency – on top of trading costs.
The extra charge, which also replaces the broker's existing £25 annual fee for individual savings account (Isa) holders, will be taken from accounts in August, when investors will be granted three 'free' trades worth £37.50. Selftrade tells the FT's Steve Lodge that this is fairer:
"On our current structure, our trading customers subsidise those who use us mainly as a custodian." Yet such higher costs are becoming the norm, with extra charges now "common" among online stockbrokers, says Selftrade's head of research, Stephen Barber.
All of this hardly sounds like great news for investors. So if you're looking to start dealing, or you'd like to change your service, what should you be looking for? It still makes sense to deal online, as the costs are invariably cheaper than telephone trading. But as the table of major brokers below shows, the fee per trade can vary quite widely – so think about how often you're planning to deal.
Some brokers offer discounted dealing rates for regular customers. For example, Selftrade's frequent trader rate of £6 per deal kicks in after the first 100 trades have been executed at the firm's standard rate in each calendar quarter. And E*Trade offers frequent traders – here, those who deal more than 20 times a month – access to some of its fundamental and technical analysis.
This is great, of course, if you plan to trade on a near-daily basis. But the reality is that the average online investor currently trades just 1.32 times per quarter, according to research company Compeer. That means that in many cases they are likely to fall foul of so-called 'inactivity fees', which are extra charges levied on investors who trade infrequently or not at all.
If you think you're more likely to fall into this category, you might want to consider a broker such as Halifax Share Dealing or Interactive Investor, which charge flat trading rates. As Interactive Investor's head of investment Rebecca O'Keefe says: "We don't offer frequent trader dealing rates but we aim to be good value across the board. We only want investors to pay when they're trading."
Another point to remember is that the cost of dealing in foreign stocks is usually higher than for London-listed shares, so if you plan to buy overseas-listed stocks, do make sure that your broker can do it, and find out how much they will charge for the service, before you sign up.
One last point to note: don't forget that stamp duty – currently payable at a flat rate of 0.5% on the value of the deal – will also be charged on your purchases, although not on sales.
Major online stockbrokers and their fees
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