Stockbrokers explained How execution-only stockbrokers work
As well as regular share-dealing accounts, which let you trade in person, by phone or online – or a combination of these – other execution-only accounts let you invest in stocks and shares within an Isa or Sipp (self-invested personal pension) for the tax benefits they offer.
Some accounts let you invest in pooled investments such as unit trusts or Oeics (open-ended investment companies). Others let you trade CFDs (contracts for difference) or carry out spread betting, which both allow you to profit on falling, as well as rising, share prices without actually owning the shares themselves. However, you’ll need to be an experienced investor for these. Some brokers even make you take a test before you can trade in these riskier securities.
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Most internet and telephone execution-only services are nominee accounts. This means your stocks and shares are held electronically in the stockbroker’s name but you are still the ultimate owner.
The advantages of this are that the stockbroker can deal with all the administration involved in buying and selling for you. This ensures you can settle transactions quickly and avoid losing money by missing a deadline, as documents don’t need to be sent back and forth in the post – deals done on the London Stock Exchange must usually be settled three working days later.
Previously, using a nominee account meant you didn’t receive correspondence, such as company reports or invitations to shareholder meetings, directly from the companies you held shares in, as your name didn’t appear on their registers.
However, the Companies Act 2006 gave nominee shareholders the right to receive this information directly if they ask to (but whether you can actually get this depends on whether your stockbroker has the necessary system in place) as well as get shareholder perks.
Holding shares and settling transactions electronically is done through a system called Crest. It was launched in 1996 to avoid the delays that can be caused by having to post paper share certificates to transact. In 2002, Crest became part of the Euroclear group, which has also taken over other European settlement systems.
Some stockbrokers, such as Charles Stanley, give you the option to hold and trade shares electronically in your own name by taking out personal membership of Crest so that you get correspondence directly. This can be cheaper as there’s less administration involved for the broker.