Opening an investment account and making your first transaction
This is the third part of our series aimed at people new to investing. Parts one and two looked at why you should consider investing, how much you might invest and the benefits of starting as early as you can.
In this article we will explain how to kick your investment journey into gear by finding an investment platform. We also talk through the mechanics of buying and selling funds and shares.
CHOOSING AN INVESTMENT PLATFORM
Once you’re convinced that investing is right for you, it’s time to open an account with an investment platform that suits your needs.
It is considerably easier (and cheaper) to invest online than over the telephone, so for most people this will be the obvious route.
There are number of factors to consider when choosing a platform provider. Cost is one – dealing costs of £10 or less are now commonplace on individual shares and are often significantly lower for funds.
AJ Bell Youinvest charges £1.50 to buy or sell funds online, £9.95 for shares or £4.95 if you trade them more regularly. Investment trusts and exchange-traded funds are categorised as shares when it comes to charges.
You can consult the provider’s website to get a handle on the different charges you will face when investing in shares and funds. This will also include a fee for holding your investments, typically called the custody charge, and is levied on a quarterly or annual basis depending on who you use.
For AJ Bell Youinvest customers using a Stocks and Shares ISA the custody charge amounts to 0.25% of the value of your shares up to a maximum of £7.50 per quarter. For funds the charge is the same for holdings up to £250,000, with a sliding scale heading downwards based on the size of your fund holdings thereafter.
It is not simply about cost, you also need to consider the levels of support you will receive in terms of investor education and customer care.
We will look at the costs of investing in more detail in the next part of this series.
APPS CAN MAKE IT SIMPLE
Just as increasing numbers of people use apps on phones to do day-to-day banking, the same is possible with investing.
Most providers will allow you to buy and sell stocks and funds over their apps and they will also enable you to easily keep track of your portfolio and how it is performing.
Just remember investing is a long-term exercise and you should not get too caught up in daily fluctuations in the value of your holdings.
WHAT IS THE DIFFERENCE BETWEEN EXECUTION-ONLY, DISCRETIONARY AND ADVISORY?
The decision on which platform to use will be dictated by how you plan to approach investing. For most of us this will involve an execution-only service.
This is the cheapest option available and under this remit a provider will buy or sell according to your instructions without providing any form of advice. You would choose all the investments yourself.
The polar opposite is the discretionary account where all the decisions are taken by a stockbroker or a wealth manager, who might also manage other aspects of your finances. This involves incurring significant charges.
An advisory account sits in the middle – you receive a certain amount of advice but the decisions are left up to you. This advice also comes at a price and for investors looking to build small or simple portfolios it is difficult to justify the extra cost.
In the last decade robo-advisors have emerged which offer an online portfolio management service which uses algorithms to produce recommendations based on your answers to various questions. However, because these are relatively new they have limited track records and some people still prefer more of a human element when investing. Several of these services have been closed down after failing to attract enough investors.
It certainly makes sense to invest through a Stocks and Shares ISA in order to keep your returns out of the hands of the taxman. You can invest up to £20,000 a year in a Stocks and Shares ISA and you don’t have to pay any tax on capital gains and dividend income for investments kept inside the wrapper.
It’s also worth considering putting as much as you can into a pension, assuming you don’t need the money until age 55 at the very earliest. You can pay the equivalent of your earnings into a pension each year, up to a maximum of £40,000 and benefit from tax relief at the rate at which your income has been taxed.
Setting up a regular investment
Landscape architect Martin, 40, has done some work on his finances, freeing up an extra £80 worth of cash per month. Sick of the low rates of interest on savings accounts he decides he wants to invest in the markets for the first time with this money.
He creates an account with his chosen provider and sets up a direct debit to regularly fund it with £80 a month. With the aim of keeping costs down he decides to use an exchange-traded fund covering a global index to get diversified exposure to shares.
He finds a suitable product on his provider’s site which is eligible for regular investment. From his account page he clicks on the regular investment tab and selects to invest £75 per month, leaving some cash left over from the direct debit to cover transaction and custody charges.
WHICH ACCOUNT DO I PICK?
Once you’ve done your research and picked a provider you can open an account. Go to your chosen provider’s website and select the investment account which is most appropriate for you, such as a Stocks and Shares ISA, Lifetime ISA, Junior ISA or SIPP (self-invested personal pension) and click to open one.
The process is straightforward and can take as little as 10 minutes. Typically you will be asked to provide:
– Your address details for the past three years
– Your debit card details
– Your telephone number
– A valid email address in order to receive your account confirmations by email
– Your National Insurance number
Once you have completed the online form you need to have a spin through some documentation. Assuming your application is successful you will receive your account number at the end of the process.
Now you’re ready to start funding your account – which you can do by transferring a lump sum from your bank account using your debit card. Alternatively you could set up a direct debit to regularly fund your account.
Once the cash is in your account you’re ready to invest. Often more inexperienced investors will start with funds and we think that is the correct approach to take as you benefit from diversification rather than risking all of your money on one or a handful of individual companies. A fund will have a portfolio containing lots of different things so if something goes wrong with one of them, the rest of the portfolio should act as a cushion and stop you experiencing big losses.
You can buy and sell when you want or use a regular investment service where you pay a reduced transaction fee to invest on a specific day each month. The investment platform will group your order(s) with ones placed by other investors and do everything in one go, thereby reducing its own trading costs.
WHAT IS A NOMINEE ACCOUNT?
If you’re buy and selling shares online via an execution-only service you will almost certainly be investing through what is called a nominee account. In effect this allows you to own shares without added complications and paperwork. The platform will hold the shares on your behalf. Legally you still own your investments but your name will not appear on each investee company’s share register.
EXECUTING AN ORDER
For a one-off investment you will start by clicking on the deal or trade button. This places an order which is an instruction to buy or sell your chosen investment.
You need to have enough cash in your account to fund any regular investments and charges. If you don’t then small bits of existing investments could be sold to pay these fees.
With funds you will select how much you want to invest. They can take a few days for the order to be processed and completed. Before you trade you will need to confirm you have read the necessary information about a fund including the Key Investor Information Document (KIID). This is a short document that provides important background about a fund which can help you decide if it is a suitable investment for you.
For a share transaction you will be provided with a time-limited quote to buy (or sell) at a certain price, reflecting the fact that share prices move around all the time. You can either select how much money or how many shares you want to trade. You will then be shown the total cost of the transaction.
A share trade in action
Employed by a large IT firm, 35-year-old Maria recently received a promotion. She already has some cash savings tucked away and some funds in a Stocks and Shares ISA. Having gained some experience and knowledge of the markets, she plans to use the increase in her disposable income to begin investing in individual stocks.
She logs into her investment platform and selects the company page for her targeted investment, a technology firm which she knows through work. She selects to buy and chooses to invest in £2,000 worth of shares. She is quoted a price, which she accepts within the 10 second window. She then gets confirmation of the trade and all the details of the order including the full transaction costs.
Disclaimer: AJ Bell is the owner and publisher of Shares. The writer Tom Sieber and the editor of this story Daniel Coatsworth own shares in AJ Bell.