Stockbrokers explained Getting started with stockbrokers

Dealing in shares is complex

If you want to invest in stocks and shares, you’ll need to find a stockbroker to buy and sell for you. However frequent a trader you are, share dealing can be a complex area to navigate, with many types of stockbroker service and dealing methods available. Below, we explain the basics to help you make the right choices.

Is share dealing for you?

Before you start share dealing, you should consider the following five questions. If you can answer ‘yes’ to each you are in a position where you can consider investing.

• Aside from your mortgage, are you free of debt?
• Do you have life insurance if you have dependants?
• Have you joined your employer’s pension scheme, or do you have your own pension?
• Are you protected through your own or a work income protection policy, if you couldn't work because of long-term illness?
• Do you have between three and six months’ savings available to you, in the event that you lost your job?

However, even if you do have the above five 'safety nets' in place, you need to be aware that share dealing is more risky than buying shares through investment funds such as unit trusts and investment trusts. This is because these options have you pooling your savings with other savers in many companies, rather than on your own.

Stockbroker services

There are a range of stockbroker services to choose from, depending on your level of investment knowledge, how confident you are with share dealing and how much time you have to spend researching the market. The more involvement your broker has, the higher the charges you’ll tend to pay for their service.

In this report, we’ve focused on execution-only stockbroker services, but you can also choose discretionary or advisory services. All three are explained below.

Execution-only services

An execution-only service means that your stockbroker makes trades based on your instructions, without giving advice. These trades are usually made either by telephone or over the internet. This type of service suits more experienced investors who want to make their own trading decisions.

Although this is the cheapest type of service, remember that investing directly in stocks and shares is one of the riskier ways of investing, and you need to be prepared to lose some or all of what you invest. 

Some stockbroking firms specialise in execution-only services, and many also provide online market information and research tools to help you decide which stocks to trade. 

We’ve gathered information on execution-only services from some of the UK’s major stockbrokers and analysed their costs. See the table of stockbrokers for full details of these services and a comparison of costs in three different scenarios.

Discretionary services

If you opt for a discretionary service, this means that your broker can buy and sell shares on your behalf, based on your requirements, without consulting you each time. Deals can be done immediately in response to changing market conditions, rather than after your broker has contacted you. Good opportunities are less likely to be missed but there could be a risk that more deals are done than necessary.

A discretionary service is a good option if you don’t know much about investments and don’t want to devote a lot of time to share dealing. You will typically need a minimum of £100,000 to invest in shares to make the extra cost worthwhile, though, or £50,000 to invest in funds.

Advisory services

With advisory services, the stockbroker either advises you about what shares to buy and sell, according to your needs, or looks at your investments as a whole to achieve longer-term goals. The stockbroker will consult you before taking any action and it’s up to you to decide whether to take their advice. You may also be sent market information and stock recommendations to help you make informed decisions.