How to find a stock broker

In order to buy shares in the stockmarket, you need to use the services of a stockbroker. This page explains how to find a good stockbroker.

What is a stockbroker?

A stockbroker is someone who is licenced to deal in stocks and shares on behalf of their customers. Traditionally stockbrokers were expensive exclusive outfits who only dealt with wealthy clients, but the internet has opened things up.

Many stockbrokers now offer execution-only services (which mean they buy shares on your behalf without giving you advice) online, at a low cost. You simply need to register with an online stockbroker, select the shares you want to buy and then click buy or sell and the deal will be executed on your behalf.

What type of stockbroking account do you want?

In the UK there are three main types of stockbroking account:

1. Certified accounts. These are the original type of stockbroking accounts, where you phone to buy or sell, someone executes for you, and you get sent a share certificate if you buy and have to send them the share certificate if you sell. They tend to be more expensive than the nominee type accounts because of all the paperwork they have to process. With certified accounts, you are registered as the owner of the shares on the company's share register, and they will send you correspondence directly, eg the annual report, dividend cheques, any freebies they offer shareholders and so on.

2. Nominee accounts. This is where your shares are held in a nominee account at the broker. The nominee account is registered on the company's share register under the broker's name, and the broker then divides the holdings amongst the clients who have bought them. From the broker's point of view this is cheaper, but note that you won't receive direct correspondence from the company whose shares you have bought.

Most online stock brokers use nominee accounts and they are cheap and quick to use as everything is done electronically.

3. A Crest-sponsored account. This is like a nominee account in that it's all done electronically, but you are plugged into Crest, which is the London Stock Exchange's own electronic system, and all the charges relating to the management of the account will come from them and they treat you like a Crest member. In terms of shareholder rights, because you are directly on the LSE's register, they treat you as though you have a certificate, so you will receive all the accounts and other paraphenalia that companies send their shareholders. It's quite rare to get a Crest sponsored account.

I personally have both a certified account and a nominee account and use them for different purposes. The certified account is for my buy-and-hold shares, and I also tend to opt into companies dividend reinvestment schemes too, so accrue more shares as I go along. I use the nominee account for when I want "quick" trading, where I buy a share and sell it within a few months. I;m not concerned about dividend reinvestment in this case and take all dividends in cash.

Selecting the best online broker

The Financial Times usually has lists of the best online stock brokers, together with a list of all the fees they charge.

Most of the big retail banks will have online sharedealing arms, for example Halifax Sharedealing offer a discount online service, as does Barclays Stockbrokers, NatWest, HSBC and Etrade UK.

Charges

If you deal shares frequently, charges become very important as you incur a dealing fee everytime you buy or sell. If you are dealing in small amounts of shares, the dealing fee can frequently wipe out most of the gains you have made from owning the share. Therefore go for one of the discount stock brokers. Note that these will usually be online brokers with nominee accounts.

If your investment style is buy-and hold, the dealing fee won't be as important as a percentage of the amount of money you make on a share deal.

Some stock brokers charge a quarterly administration charge on top for "managing" your holdings (for nominee accounts only). If you hold a certification account, you look after the certificate yourself and receive dividends directly from the company you own shares in, and thus there is no admin charge.

Other considerations

If you want to deal in international stocks (stocks listed on the NYSE, NASDAQ, DAX and CAC) as well stocks on the LSE, check that your broker allows it. Most will not, though some online brokers are expanding what they allow.

When you choose your stock broker, decide which of the criteria described above is important to you and then choose accordingly.

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Growth Investing and Jim Slater

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