How shares are traded
1. The role of brokers
For most share dealing you will need to use a broker that is a member of the London Stock Exchange and regulated by the Financial Services Authority. You can pick from three types of service:
- The broker has general discretion as to how he manages your portfolio.
- You can narrow the discretion by giving the broker guidelines. For instance, you can ask him to pick shares that provide high income rather than capital growth, or to investing only in 'ethical' companies.
- For his services you pay a commission on dealing (usually around 1.65%) and possibly a quarterly or annual management charge based on the value of your portfolio. If you are paying a management charge, your dealing commission should be lower (around 1%).
- Beware of the discretionary broker who churns your portfolio. Churning means frequent dealing which creates commissions for the broker but may not be in your interests.
- The broker will contact you to suggest changes in the composition of your portfolio, but he does not have the authority to trade on a completely discretionary basis.
- Charging structures will vary from broker to broker. Some charge more for an advisory service than for a discretionary service, because there is more work in having to contact you before every deal.
- Under FSA rules you will have to fill out a form describing your financial situation and your objectives, so that the broker can provide a suitable service.
- Execution only
- The broker's primary function is to execute the buy/sell instructions which you give him. He does not give advice either proactively or at your request.
- Varying degrees of administrative help will be provided - e.g. summaries of your year's trading for your tax return, factual education
- Execution-only brokers make their money from dealing commissions, and the market is very competitive. Typically, the percentage charged on a purchase or sale depends on the value of the transaction, with the percentage dropping as the value rises. There will usually be a minimum charge.