This piece first appeared in Reader's Digest in June 2000
 The text here may not be identical to the published text

You have just bought your computer and you want to invest on the stock market. It is a heady mixture - a new computer with fast internet access and just a click of the mouse away from those share-dealing sites where you can look at the same information the professionals have and buy and sell shares as the price changes. Surely anyone with a bit of sense and a few bob to put in can make money?

First, calm down. Investment in the stock market is for the long term unless you have money you can afford to lose and you know a lot about the short-term movement of shares. So I am not advising anyone to join the day trading brigade – people who buy shares in the morning and sell them in the afternoon in the hope of making – literally – a quick buck. But buying and selling shares on line can make sense if you are a serious investor who wants to keep an eye on your portfolio and make quick changes to it for sound, market and company reasons.

OK lecture over. How do you start? There are at least ten websites in the UK run by stockbrokers where you can buy and sell shares. Although it is easy and relatively cheap, it is not free. One top of any fees – more details of those later – you have to add on the cost of access to the Internet. You will usually have to pay call charges and, with some service providers, an access charge as well. That all adds to the cost of dealing with your portfolio over the Internet. Ask yourself if a phone dealing service may not be better – and it has to be said less tempting. Some Internet service providers are beginning to offer a flat rate monthly charge instead of charging for calls by the minute. If you are going to be on line for a long time each day or evening, then one of these services may be a good idea.

So what can you expect from your stockbroker? First, they will all be what is called ‘execution only’. This curious phrase means only that they will NOT give you advice about what to do. That traditional kind of stockbroking is expensive and is normally used by wealthy people with large sums of money invested. Modern stockbroking is cheap and painless but you have to make all the decisions. Which is good, because it’s your money. But not so good if you do not understand how to make the best choices.

Second, they will offer some kind of information service. You will get access to the price of all the individual shares quoted on the London stock market as well as the indices such as the FTSE 100 – the index of the share price of the biggest hundred companies. Some will also offer information about companies that are going to be launched on the stockmarket, about currencies, about unit trusts, and in some cases even about overseas markets. Though take care – often the information you are given about share prices and the movement of indices which is delayed by 20 minutes. This information is provided free by the London Stock Exchange. If you want information on all shares in what is called ‘real time’ - that is as it happens – you will have to pay extra. Charles Schwab, the largest online stockbroker, charges £10 a month for this service.

Third, they will all let you deal in shares. Prices vary but the fee may be quoted as a percentage of the amount you invest – usually with a lower and upper limit. Or it may be a fixed amount. For example Halifax Online charges £12.50 for deals up to £2500 and £22.50 for if they are up to £60,000. The fee is charged when you buy AND when you sell. In addition there is stamp duty of 0.5% to pay the government when you buy – but not sell – shares. Some brokers will also impose an annual or monthly administration charge. And remember that when you do a deal, they will always quote two prices for shares – a buying price and a selling price. You will always pay more to buy than you will be given if you sell. This difference is called the ‘spread’. So you pay a fee to buy, plus stamp duty, a fee to sell, you pay for the spread, maybe an administration fee, and phone charges to access the internet as well.

Take a typical share such as Dixons bought through a typical online stockbroker. To buy them you might be asked to pay 327p. But if you sell them you will get just 320p each. So if you bought 1500 shares it would cost you £4905 + £22.50 dealing fee plus Stamp Duty of 0.5% which is £24.53 – total cost £4952.03. If you then sold them at once before the price moved you would get just £4800 minus another £22.50 dealing fee (at least there’s no stamp duty to pay on a share sale!) – a total return of £4777.50. So in five minutes you have lost £174.53 – or 3.5% of the money you laid out before counting the administration fee which some charge or the cost of internet access. If you are to come out with a profit, the shares have to gain quite a bit more than 3.5%. Such figures are sobering. And that is why I always say ‘shares are a long term investment’.

Most online dealing sites insist on you registering and lodging money with them before you deal. So although dealing is instantaneous once you have registered, the process of beginning to trade can take a few days, even a couple of weeks. One exception to that is Barclays Stockbrokers which lets you register and deal right away, up to a limit of £7500.

The huge growth in the number of customers dealing directly through the internet has led to some sites becoming overloaded. Halifax Online admitted in March that some customers had waited hours before a ‘buy’ or ‘sell’ instruction was actually executed. The company refused to pay compensation on the grounds that the price could have risen as well as fallen in that time so the customers did not necessarily lose out. Others, including Charles Schwab and Barclays, have all had problems with too many customers wanting to deal at the same time. Long delays between your order being made and the actual deal being done are rare – but in the fast moving world of share prices even a few minutes can be crucial. Barclays Stockbrokers offers the only service which, once you have agreed a price to buy or sell, guarantees the deal at that price – the company takes the risk of any delay in its execution. With the others, whether it’s fifteen seconds or fifteen minutes or, rarely, a few hours, the risk that the price has moved in the wrong direction is yours.

Finally, if you are going to put money directly into the stockmarket in individual shares only use money that, if the worst comes to the worst, you can afford to lose. It is a gamble – you are backing your own skill and judgement with real cash. Make sure you can afford it.

June 2000

e-mail Paul Lewis on paul@paullewis.co.uk