It is possible to start saving as little as £50 a month and soon have an investment portfolio but just watch those charges
Thursday 13 Feb 2020 Author: Yoosof Farah

Getting started with investing can seem quite daunting with the perception being that thousands of pounds are needed before you can kick off.

In reality, that’s not the case at all and technically you could start by buying a share in a company for 1p for example, although this would not be advisable as dealing fees and other charges mean you’ll most likely never recoup that investment.

We think £150 a month is more realistic as the minimum you could invest without fees representing too big a proportion of the overall transaction. Read on and we’ll explain the different options.

Some experts suggest a £1,000 lump sum could be a good starting point for shares, investment trusts or exchange-traded funds (ETFs) or £500 if investing just in traditional funds as their transaction fee is much lower.

Can't afford to invest £150 a month?

– Put £50 into your ISA

– Do the same in months two and three

– Once you’ve saved £150, invest the lot in a fund

Based on a rough average from the main investment platforms, you would expect to pay about £10 to buy or sell shares, investment trusts and ETFs. So if you wanted to invest £200 in a company, your transaction fee of £10 would equate to 5% of your investment. That’s quite a large proportion, particularly as you would pay the same again to sell.

Investing £1,000 would bring the transaction fee down to a mere 1% of the money you use to buy the shares, which is much easier to stomach.

Buying funds can be much cheaper, typically £1.50 per transaction. Therefore to get the fee down to 1%, you would be looking at putting a minimum of £150 into funds.

Most investment platforms offer a regular dealing service which only costs £1.50 to buy stocks, investment trusts and ETFs, rather than the £10 fee you’d typically find in the industry. Therefore it is possible to apply the £150 minimum investment across all the main asset types.

The downside of the regular dealing service is that investment platforms take the money and process the transaction on a specific day each month, so you can’t buy any time you want. Such services can also be restricted to the FTSE 350 index for shares but still have a fairly wide choice for investment trusts and ETFs.

If finding £150 is beyond your means, why not put £50 a month into your ISA and then put the whole lot into a fund at the end of every three months when you’ve built up £150 of savings.

OTHER FEES TO CONSIDER

There are additional fees to consider including a custody charge which is the money you would pay your investment platform for holding investments on your behalf.

WATCH FEES IF YOU ARE REINVESTING DIVIDENDS

You can often reinvest dividends for as little as £1.50.

But such fees can still represent a large amount of your dividend if you only have a small investment.

For example, let’s say you received £7.50 in dividends. Reinvestment costs of £1.50 equate to 20% of your dividend payment.

If you had a much bigger stake in the company and received £75 in dividends, the reinvestment fee would only represent 2% of your dividend, so you would only be giving up a small part of your reward.

The amount of fees and how often they are applied varies across the industry. For the purposes of this article, we’ll use AJ Bell Youinvest’s charging structure to illustrate the range of charges.

For shares, investment trusts and ETFs you would pay £9.95 to buy each one, or £4.95 if you carried out 10 or more online deals in the previous month. You would then pay a quarterly custody charge representing 0.25% of the value of your shares, investment trusts and ETFs each year, up to a maximum of £7.50 per quarter.

There is also stamp duty of 0.5% to consider when buying shares in companies or investment trusts listed on the London Stock Exchange. You don’t pay stamp duty on ETFs unless they are domiciled in the UK – but that’s very rare.

Funds cost £1.50 to buy and fees are tiered. You pay 0.25% quarterly fee on the first £250,000 worth of funds in your portfolio with AJ Bell Youinvest, dropping to 0.1% on the value between £250,000 and £1m, and then further reductions the bigger the size of your fund portfolio.

Funds, investment trusts and ETFs also come with annual management fees which cover the cost of running the products. You don’t pay these through your investment platform provider; instead, the fees are taken within the fund itself.

ONLINE IS MUCH CHEAPER

All of the costs we’ve mentioned so far in the article apply to online transactions. Buying shares by telephone is three times the price compared to online at £29.95 while a paper application would cost £100 per transaction.

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