Don't put all of your eggs into one basket

Low online dealing costs may encourage more people to log on. The big question is which broker to choose

The number of online brokers in the UK has increased from just three at the beginning of last year to 23 today. The latest to launch is discount broker idealing.com offering flat dealing rates of just £10 a trade. Such low rates will inevitably encourage more and more people to deal online.

The number of online brokers in the UK has increased from just three at the beginning of last year to 23 today. The latest to launch is discount broker idealing.com offering flat dealing rates of just £10 a trade. Such low rates will inevitably encourage more and more people to deal online.

The question is which broker to choose. There are distinct differences between the various online brokers, and investors should be aware of these before setting up an account. Switching accounts between brokers can take up to six weeks and end up costing you hundreds of pounds - so choose wisely.

Setting Up Your Account

Setting up an account with an online broker normally takes between five and 10 days, provided the information you submit is correct and the broker can verify that you are who you say you are. Opening an account can be significantly delayed if you have changed your address or bank recently, or are not on the electoral role.

To open an account, you will need to complete an application form, sign it and return it in the post. It is useful to have things like your National Insurance number, passport number and bank details to hand as you may be asked to include details of these. In most cases, you can access an application form online. Some brokers ask you to print the form, sign it and send it back which means you will need to have a printer. The alternative method is to fill in the application form online and e-mail it back to the broker who then sends it to you in the post for signing. A comprehensive list of contact numbers and links for online brokers can be found at www.investment-gateway.com.

Funding Your Account

The quickest way to fund your account is to send a cheque. If you choose to fund youraccount via a direct debit, be aware that these normally take between eight and 10 days to set up. Most online brokers insist that you have cleared funds in your account before you can buy shares. The exception is DLJ Direct (www.dljdirect.co.uk) which will allow you to buy shares on receipt of your cheque. Some brokers such as Barclays (www.barclays-stockbrokers.co.uk) set up an online broking account which is linked to your existing bank account via direct debit. In this case, you can buy shares as soon as your account is set up, providing you have sufficient funds.

The Differences Between Various Online Brokers

One of the major differences between the various online brokers is cost. A list of set up charges and dealing commissions can be found at the Investment Gateway website. The cheapest is currently Hargreaves Lansdown Stockbrokers (www.h-l.co.uk) with a flat rate of just £9.95 a deal. The most expensive online broker appears to be Killick & Co (www.killick.co.uk) with a dealing charge of £30 for a £1000 deal. In this example, the difference between these two brokers is the latter gives personal advice and offers features such as margin trading, which are not services offered by low cost execution only brokers. Sometimes (but not always) the old adage "you get what you pay for" holds true.

Real Time Versus E-mail Trading

Some brokers deal "real time" which means that you know the price you are dealing at before placing a trade. Other brokers use a system whereby you effectively e-mail your order to a dealer who then places the bargain for you. There is obviously an advantage to knowing the price at which you can deal in advance but e-mail based trading systems can be more flexible in terms of the stocks you can buy, and when you can place your order.

Certificated Versus Nominee Accounts

Most online brokers only offer a nominee service retaining the certificates on your behalf. If you have the certificates you can choose which broker to sell them through. Barclays Stockbrokers offers a fully certificated service and, for a small additional fee, Sharepeople (www.sharepeople.com) and Natwest Stockbrokers (www.natweststockbrokers.co.uk) will deal in certificated holdings. Some brokers such as Xest (www.xest.com) and Stocktrade (www.stocktrade.co.uk) offer sponsored CREST membership where you do not have certificates, but receive the same benefits as those holding the shares directly. Dividends and report and accounts are sent directly to you and you retain any shareholder perks.

Choosing the Right Online Broking Service

It is important to ensure that the online broker you chose offers all the features you require.

It is no use opening an account with a broker which only deals in stocks with a full listing on the London Stock Exchange if you intend to deal in those listed on AIM (Alternative Investment Market). Similarly an account will be no good if the trading system doesn't work on your computer system or with your preferred browser.

Ten Questions To Ask Before Buying

1. Can the online broker deal in all stocks over the internet including AIM shares and warrants?

2. Is the service real time or e-mail based?

3. Is it a nominee service, sponsored CREST membership or fully certificated?

4. Can I get free access to news, charts and portfolios?

5. What are the initial set up costs and the annual charges ?

6. Is a flat commission rate offered regardless of deal size?

7. Will I receive dividends, report and accounts and shareholder perks?

8. What are the costs of moving my account?

9. Do I need to set up a separate bank account and if so what rate of interest is paid?

10. Is the service fully compatible with all computers and browsers including Macintosh?

Conclusion

Don't put all your eggs in one basket. Online brokers are heavily dependent on computer systems and the internet. If there is a problem with either, you may have problems buying and selling shares. Spread your risk by opening accounts with a number of different brokers. Some brokers are better for online PEPs and ISAs, whereas others are better for actively trading. Although each broker might claim to be the best, experience shows that different brokers tend to have their good points....and their bad points.

Michael Scott is the Author of 'The UK Guide To Online Investing' published by McGraw Hill and a new book 'The UK Guide To Online Brokers. Both books are available at www.investment-gateway.com or on freephone 08000 564003.