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How to buy shares and other securities

Successful investing is not just a matter of picking the right investments at the right time but finding the best, and most cost effective way of buying them.

How to buy shares and other securities

Successful investing is not just a matter of picking the right investments at the right time but finding the best, and most cost effective way of buying them.

Buying shares

Trading in overseas stocks

Buying funds

Buying bonds

Buying other investments

Buying shares

Investing in the stock market is as far removed from the image of the dapper city gent in his bowler hat as you can get. These days you can trade shares through your bank, over the phone or the internet.

The first thing you need to do is decide what type of broker you want. If you want help with your investments you might be best suited to a full advisory service, where the broker will look at your individual circumstances and devise a strategy specifically to suit your needs, monitor your investments and make suggestions on buying and selling shares. Some may even buy and sell shares for you without asking for your approval first. This service, known as discretionary broking, is highly tailored and, unsurprisingly, can prove expensive.

These days most people are prepared to do their own research, which, after all, half the fun of investing. If you are in this camp you need to look for an execution only stockbroker.

Execution only means that the broker will simply take your order and execute it for you. These brokers cannot legally offer you any advice on your decisions and to keep costs down usually operate over the phone or the internet.

This does not, however, mean they will not provide you with any tools to help you make the best investment decisions. Many execution only brokers, particularly the larger firms, offer all kinds of research and online tools for everyone from the novice to the real expert.

To a large degree, finding the right broker for you will depend on your individual requirements but there are four factors you should look for: quality of information, speed of execution, markets available and cost. Generally speaking, the better the information on offer, the more you will pay.

Use the London Stock Exchange’s Locate a broker service to select a broker to meet your needs.

While telephone and internet services may give you access to instant dealing, completing your deal takes a little longer. By law all share deals have to be ‘settled’ three days from when they were struck, often known in the trade as T.

Deals can be settled so quickly because shares can now be held electronically rather than in paper form. But this form of ownership has its downsides. Your shares are held in a nominee account managed by your broker and the name of the ultimate owner is not known to the company. This means there can be no direct communication between you and the company and you must rely on the broker to pass on annual reports and dividends.

You can still get the certificate if you really want it but you might have to pay an extra fee when you trade and settling your deal might take longer, perhaps 10 days. But this is the only option if you want to hold shares that offer perks.

You can get the best of both worlds by becoming a personal member of CREST (http://www.crestco.co.uk/). This enables you to maintain a direct link with the company whose shares you own and lets you settle your deals in three days. To become a personal member of CREST you need to be sponsored by a corporate user. A number of stockbrokers offer this service. For more information, see Why invest in shares?

Trading in overseas stocks

Until recently, buying overseas shares directly has been both difficult and costly for private investors, but that has now changed. Investors can get a mine of information on overseas shares over the internet and access to American Depository Receipts and the London Stock Exchange’s International Retail Exchange has made it cheaper to trade on overseas markets.

You can get access to companies listed on European and US exchanges through UK brokers, although you will pay more to trade than if you were buying UK shares. Alternatively you can buy CREST Depository Interests (CDIs) on the International Retail Service (IRS). It offers access to more than 200 international stocks such as Coca-Cola and Microsoft.

Like any London Stock Exchange listed stock, you can trade in sterling during London market hours and settle trades with the same ease and at the same cost as UK shares. You can also save on tax as few international shares are subject to stamp duty.

If you want to access other markets without having to go direct to the local exchange, you can use depository receipts such as American Depository Receipts (ADRs). Depository receipts are similar to CDIs and can be easily traded through your broker but are dollar-denominated US securities backed by and related to the underlying company stock.

As ADRs are listed in America you will not have to pay stamp duty on your purchases but although they are priced in dollars, your ultimate currency exposure is to the currency of the underlying share.

Contracts for Differences (CFDs) are another increasingly popular way of accessing international companies. Trading CFDs is similar to normal share dealing in that you deal at the cash price of the share and pay commission on each trade of around 0.3%. Read more about CFDs and investing in other stock market instruments.

Buying funds

The main routes open to investors wanting to buy funds are: directly, through an independent financial adviser (IFA) or through a fund supermarket or discount broker.

If you want some help picking your investments, you should choose an independent financial adviser who will research the entire market and look at your individual circumstance before recommending funds. Some advisers will charge a fee for this advice, others will take commission from the fund group. This commission works out as 3% of your initial investment and is taken through the initial charge, typically 5%.

If you know what fund you want to buy you might think you can save money by going direct, but this is not usually the case as fund groups do not like to undercut financial advisers.

But there is another option – fund supermarkets. These internet-based operations offer a one-stop-shop for investors wanting to choose between funds from a range of different investment companies.

You can buy funds through a fund supermarket at a big discount to the normal fee. Sometimes this fee is cut to zero. But fund supermarkets have other advantages too, such as the ability to buy a wider variety of funds and being able to buy and sell funds more quickly – the time it takes to switch is cut from up to two weeks to just 48 or 24 hours. The downside is you won’t be able to benefit from the advice of an independent adviser who would monitor your investments for you and advise you when you need to switch to a different investment.

Read more about Investing in funds and How to pick funds

Buying bonds

You can buy government issued bonds, known as ‘gilts’ simply through the post office or a stockbroker. Corporate bonds can only be bought through a stockbroker.

If you don’t want to buy bonds directly, you can choose from a variety of bond funds run by investment companies. These funds pool your money with those of other investors and invest in a number of bonds. A professional money manager is appointed to manage the fund, for which you pay a fee.

You can buy bond funds investing in different types of bonds, including investment grade, high yield and overseas bonds. Some funds also specialise in investing in emerging market bonds.

Read more about Investing in bonds