Friends and colleagues frequently ask me about shares; primarily about how and what to buy. Particularly now in times of low interest when the search for good investments resembles finding the famous needle in a haystack. The question is indeed a pressing one; who would not prefer higher returns than those minuscule interest rate for most savings accounts?
Why funds should not be your choice of investment:
Many people who are just starting out, and even those who have been investing for some time, prefer investing in funds. Partly because it appears easier than doing your own research, but also as they believe a professional could do it better than them. Unfortunately this is far from the truth, as most actively managed funds show performances below that of the market. In other words, if one was to buy the market as a whole, that is all companies forming an index such as the Dow Jones, FTSE 100, or Dax, the return would largely be better. As buying all composites (i.e., all companies) is difficult and too cost-intensive, an ETF would be a better choice. But there is a much more pressing problem when it comes to funds.
A recent conversation with a friend went like this:
“Buddy, the interest rates are so low, I have been considering investing in the stock market,” he said.
“That sounds like a good idea. What do you want to buy?” I asked.
“I am not sure. This is what I wanted to ask you, what are the things to consider?”
“Research, that is key to investing. Secondly the costs involved in buying and selling, plus potential management fees simply for holding shares with a broker (or your bank).”
He looked at me curiously: “So, would funds be better?” he asked.
“Honestly mate, I would not invest in a fund, because of their management fees, which eat into much of your return,” I replied.
“What do you mean?”
“Well, with actively managed funds you pay a fund manager, unless you are investing in an ETF, but even then you will pay some sort of fee plus the trading fees. ETF fees are usually at least minor, maybe 0.1 or so percent. That is why for all investments, including ETFs, research is of utmost importance. Don’t put your hard earned cash into something that cannot provide you with a good return.”
“That makes sense. But what are these trading fees exactly?”
“The fees for buying and selling your shares or bonds, or whatever else it is you want to invest in.”
“I understand. How much are they? Is it expensive to trade?”
Our conversation continued for some time after. But as these are questions I am often asked, I decided to create a Q&A of share trading. So here we go:
Should I invest in the stock market/shares?
How do I invest in the stock market/shares?
The easiest and cheapest option is to trade via an online platform (i.e., an online broker). Which one is cheapest depends on where you live. There are many comparison sites available that will help you compare the trading and account fees. Generally, if a friend has had positive experiences with a particular broker, it may be a good option to go with that trusted recommendation. It is still crucial, however, to look into what broker suits you best depending on your trading profile (how to determine that will be discussed throughout the Q & A). But someone’s personal experience of the stability of a particular trading platform is second to none. Some sites may frequently be down, generally unstable, or show you outdated share prices. All of these are significant, particularly that you have access at any time and when you most need it. A situation where your broker is down, but you are eager to trade may be detrimental. Thus, always make sure you get as much information as possible on your future broker.
Is there a difference between brokerage firms?
Apart from the above, there are numerous other things to look out for. While some brokers might give you the option to trade all investment vehicles, from shares to bonds, options to derivates, others might offer only a limited selection of investment options. Other brokers might charge you extremely high fees for trading international markets, while others might only allow you to buy and sell shares from a specific country but not others. There are also brokers that provide the possibility to trade outside of regular market opening times. In other words, you would have the option to trade even after the stock markets are closed. Your trading will take place similar to a market place where only those trade that have registered for that market; similar to your local market versus the global supermarket chain.
For these reasons it is essential to know what you want to trade, where, when, and how often before registering with a particular broker.
Generally speaking, you should be able to find a broker that offers trades between €/$/£ 5 and 7 regardless of the size of your trade.
Here is a list of things that you might want to consider before choosing your future broker:
Continue to Part 2 to find out how to keep trading costs low and how to be on the safe side when trading shares
|How can you place a trade?
|Trading fee structure
||% of trade
||A fixed fee independent of trading size
||Set fee for different investment brackets.
Investment Amount: Fee for Trade
0 – 1,000: 3
1,001 – 3,000: 5
3,001 – 5,000: 8
|Is there a difference in fees between whether you want to trade your local market or other markets (see Markets)
|General account fees
||Do you only have to pay for the trades and no other fees apply?
||Do you get charged for holding the account?
||Is there an inactivity fee (ie, you have to pay a fee if you don’t place a trade in a specific period: month, quarter, year)
||Do you have to pay an opening/closing fee?
||Can you invest only nationally
||Can you invest only on your continent
||Can you invest only select countries
||Can you trade all markets
|Type of shares you can trade
||Large-caps (only the most known companies – eg: FTSE 100, Dax)
||Mid-sized companies (eg: FTSE 250, MDAX)
||Small-sized companies (eg: FTSE SmallCap, SDAX)
||All types of shares
||Only during the opening hours of the market
||Outside the official market hours (after-hours trading)
|Types of asset classes (4 main classes for the majority of investors)
|Do you receive interest on idle cash
|Is it possible to invest in tax free vehicles (eg: Share ISA)