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Savings and Investments
Guide to Owning Shares
What is it?
What are the different ways of dealing?
What should I think about when deciding how to
deal?
More information on stock broking services
More information on share-dealing services
More information on on-line trading
More information on Crest
More FAQs on share dealing
What is it?
Share dealing is the process of buying and selling shares on a
recognised stock exchange.
In theory, the actual process of buying and selling shares is
quite simple. Looking on the Internet or in the financial pages of
the press, you will find lists of shares and the prices between
which they are being bought and sold. You decide how much you are
willing to pay for the shares and put in an offer. If the offer is
accepted, you receive the shares and pay for them. Selling shares
works the same way: you offer your shares for sale at a price and
if someone accepts your offer, you receive payment and hand over
any share certificates you have.
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What are the
different ways of dealing?
You buy and sell shares:
- Through a stockbroker: you can ask the broker to advise you
or just to buy and sell shares as you direct without their
advice
- Through a share-dealing service: most banks and building
societies now offer this service
- Through an on-line trading service.
- Through solicitors and accountants
- Through the stock broking department of your bank
- Direct from the company: companies advertise upcoming share
offers in the Press, on national television and on the Internet.
You apply for a prospectus and application form, complete the
form and send it with your cheque. You need to remember that if
this is a very popular share issue, you may not get the amount
of shares for which you applied.
- Through a share shop: these are shops set up in your local
high street which may be independent, or have a connection to a
bank or building society – or even be located within the bank or
building society itself.
Note: you can buy shares from family, friends or colleagues
direct, without going through the stock market at all. You will
still need to complete the legal paperwork and pay stamp duty on
the transaction.
Each stock exchange will have its own way of dealing with the
mechanics of transferring payments for and from share deals and
with the paperwork.
See below for more information on Crest, the UK stock exchange
system for paperless trading.
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What should I
think about when deciding how to deal?
You need to think about the following when selecting the way
you will conduct your share dealing:
- What is most convenient for you? If you have the time and
energy, you may prefer to deal with all your transactions in
person
- If you find it easier to let a third party buy and sell for
you, how much control over their actions do you want? You might
want them to check every deal with you or leave it to their
judgement entirely.
- How many shares do you intend to buy and sell? A few shares
occasionally are better suited to a share shop: major
investments are appropriate for a dedicated stockbroker
- Consider the costs of each type of service
- How quickly will a third party pay you your money from a
transaction?
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More information
on stock broking services
Stockbrokers can trade shares for you in one of three ways:
- Execution only: you instruct the stockbroker to buy and sell
your shares at a given time and at a given price.
- Advisory: you ask the stockbroker for assistance in deciding
when to buy and sell shares and at what price. If you are a
major investor, the stockbroker may take the initiative and
contact you to discuss potential transactions.
- Discretionary: you give the stockbroker powers to buy and
sell your shares when they think they can obtain the best deal
for you.
Charges for each type of service vary, with execution only
being the cheapest and discretionary the highest. A commission is
charged on each transaction: the commission is a percentage of the
transaction value but you should be aware that there may be a
minimum fee. The appropriate level of fees will be outlined to you
by the share-dealing organisation before you buy or sell any
shares.
In addition to any fees due you should also consider stamp duty
on any purchase of shares. Please note that for large transfers of
shares there is also a 25p levy due to the Panel of Traders &
Mergers.
Although you can pay your stockbroker by cheque each time you
complete a transaction, your stockbroker may prefer you to open a
nominee account with them. This means that a given amount of money
is held in an account ready to buy shares. You will not receive a
share certificate but you will be registered as the holder of the
shares and receive dividends.
Some companies offer shareholders special discounts or
incentives on the products or services they provide. If your
stockbroker provides a 'advisory' service then they will be able
to advise you of any share holder incentives available.
The stockbroker’s account should be held separately from the
rest of the firm’s accounts, so if the firm goes bankrupt your
money is not affected.
The advent of paperless trading has helped to speed up the time
in which settlement is made. See our section on Crest for more
details.
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More information
on share-dealing services
Many investment companies, banks and building societies offer
share-dealing services for the public. However, unlike stock
broking firms the services offered are normally on an execution
only basis (this is where you instruct the stockbroker to buy and
sell shares on your behalf and they do not give any advice as to
the suitability of such a transaction). You can usually give your
instruction for the transaction by letter, telephone or more
recently via the Internet.
Charges for share dealing services are competitive with
stock-broking services, and may be less. You will still have to
pay stamp duty and, on large transfers, the Panel of Traders &
Mergers’ levy of 25p.
Share-dealing services linked to financial institutions like
you to have an account with them, so that they can take money
directly from it for purchases and pay directly into it money from
sales.
If the company you work for has employee share option schemes,
it may have an arrangement with a share-dealing service (or a
stock-brokers) where you can trade your shares at a discount.
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More information
on on-line trading
With the growth of use of the Internet, on-line trading is fast
becoming one of the most popular ways for investors to trade
shares. The principal advantage is the speed at which transactions
can be made, allowing you to capitalise on the rises and falls of
the stock market.
On-line trading facilities are now offered by both dedicated
'on-line' share dealing businesses and also by the traditional
stock-broking firms. It is important for you to be aware that most
of the 'on-line' trading facilities have been established on an
'execution only' basis (i.e. this is where you receive no advice
on the suitability of the transaction you wish to make) and
forfeit any rights to complain.
On-line trading systems take care of the whole process of
settlement following your transaction. They deposit or take
delivery of shares from an electronic Crest account. They also
ensure that once delivery has taken place, payments are
automatically paid into or taken from your deposit account.
Charges are competitive compared to traditional stock-broking:
from £14.50 per transaction (depending on the size of the
transaction). You pay stamp duty on all transactions and, on large
transfers of £10,000 or more, the Panel of Traders & Mergers’ levy
of 25p.
Services can also offer access to on-line libraries of
information, these will enable you to study details about
companies such as their financial performance over previous years
and aspects that the current performance of the business.
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More information
on Crest
Crest is the London Stock Exchange’s paperless trading system,
set up in 1994.
The system enables brokers to settle deals in 3 days rather
than once or twice a month, as there is no paperwork involved.
If you are a private investor who makes a reasonable number of
transactions, you can choose to join Crest as a private member,
paying an annual fee of between £10 and £20.
What Crest does is hold your shares electronically rather than
you having to receive or send in physical certificates each time
you trade. You do not have to hold all your shares in Crest: you
can keep some holdings in certificated form if you wish. Your
rights as a member of a company are the same: your name will still
appear on the company register of shareholders as the proof of
your title of ownership, you will receive dividend payments, the
annual report and, usually, any shareholder discounts from the
company.
As a Personal Member, you are required to have an arrangement
with a Crest payment bank that will make and receive payments on
your behalf. The person who sponsors your application to join
Crest normally arranges this for you. The time delay in actually
receiving payments from transactions depends on the arrangements
you have with your Crest payment bank and the person who set up
your Crest account.
Theoretically, Crest is intended to lower the costs of share
dealing, though the initial outlay required by stockbrokers on
computerisation may mean brokerage charges actually rise in the
short term.
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More FAQs on
share dealing
When do I pay for the shares I buy? And when do I get the
money from the shares I’ve sold?
On the UK stock exchange, there is system of ‘rolling
settlements’ in place. This means that you have a given amount of
time – 3 days – to pay for your shares. The money you earn from
selling shares must also be delivered to you within 3 days. If you
are using a stockbroker, they must complete all the paperwork
within this time frame too.
Because this is quite a tight deadline, the nominee account is
very popular, where you keep a certain amount of money ready for
trading. This saves the stockbroker from having to produce a
certificate for you, and at the same time the stockbroker knows
you have the money there and are ready to pay.
Alternatively, you can reach an arrangement with your broker to
settle in 10 days, as brokers recognise that completing the
paperwork and payment in 3 days can be very difficult for private
investors. |
