Dealing in Equities Online

Believe it or not, there are at least 45 branded online equity dealing services in existence, despite noticeable departures, consolidations and some shameless white labelling. Of the current pack, Charles Schwab Europe has been acquired by Barclays and will go gently into a new website, probably in the autumn of 2003.

The term "online share dealing" is a bit dated these days as the brokers strive to beat off the competition and to raise investor activity, by transforming their share dealing operations into "equity supermarkets" characterised by: -

• A wide range of tradeable securities
• A diversified selection of equity surrogates
• Self-selection in respect of "big ticket" items like self-invested pensions
• More investor-friendly functionality
• Cutthroat pricing

TRADEABLE SECURITIES

Local Stocks

LSE and AIM shares are de rigeuer with selection usually restricted to Crest-settled stocks. However, myBroker, Fastrade, Hargreaves Lansdown, Sharepeople, Yorkshire Bank, Alliance & Leicester, Cortal, City Deal Direct, Clydesdale, Abbey National, Barclays Stockbrokers, Redmayne Bentley and Nothing Ventured also trade residuals.

Foreign Stocks

It is now possible to deal in foreign stocks on half the services:-

• Through a limited range of blue chip US and European stocks that are traded in sterling through the LSE International Retail Service (IRS) and settled in Crest (see Barclays, Comdirect, Halifax, Hargreaves Lansdown, iDealing, Nothing-Ventured, James Brearley, Sharepeople, Teathers-i-deal, The Share Centre, This Is Money and Virgin)

• Directly on international exchanges through Ample, Charles Schwab, Fastrade, IMIWeb, Merrill Lynch, myBroker, Royal Bank of Scotland Direct Trader, Sharepeople, Cortal, ETrade and TD Waterhouse.

Unlisted Stocks

You can deal in the shares of unlisted companies through The Share Centre's ShareMark service and on a new exchange called AngelBourse.

EQUITY SURROGATES

Margin Products

Finding something to invest in these days is no easy matter. Margin products like futures and options, contracts for difference, warrants and even spread-bets are finding their way onto stockbroking websites.

Such products are attractive in bear markets because they give investors the opportunity to profit in falling as well as rising markets. Margin products are targeted at intermediately experienced and sophisticated investors who (allegedly) understand the benefits and risks of leveraging and are more likely to be active traders.

• Futures and options in shares and market indices can be traded online through myBroker.

• Contracts for Difference (CFDs) are currently tradeable on ETrade, Hargreaves Lansdown and iDealing

• Traditional warrants (issued by companies usually as a sweetener at flotation) have long been tradeable on services like Citibank, Direct Sharedeal, ETrade, Halifax Share Dealing, Hargreaves Lansdown, iDealing, myBroker, Nothing Ventured and Stocktrade.


• Covered warrants ,issued by financial institutions, can now be dealt on Comdirect, Hargreaves Lansdown, iDealing, myBroker and The Share Centre and herald a raft of new trading instruments built on domestic and foreign equities, sector baskets and indices.

• Spread-betting which is normally the province of licensed financial bookmakers, is now available on iDealing.

Collective Investments

• Collective investments have long been tradeable on all the websites through investment trusts which are plcs in their own right.

• Unit trusts/oeics are tradeable on 24 sites

• Exchange-traded funds (ETFs including "iShares" and "LDRS"), which are open-ended tracker funds traded on the stockmarket, are dealt through Ample, Barclays, Comdirect, Halifax, Hargreaves Lansdown, IMIWeb, MoneyeXtra Frequent Trader, Nothing Ventured, The Share Centre and This Is Money.

SELF SELECTION
It is becoming increasingly common for more sophisticated investors to make their own investment decisions in respect of ISAs, PEPs and personal pensions, rather than relying upon professional fund managers.

Amazingly, about a third of the services still do not provide self-select ISA and PEP facilities, among them Abbey National, Alliance & Leicester, Ample, Citibank, Clydesdale, Cortal, Egg, Fidelity, HSBC, Royal Bank of Scotland, Saga, Share Crazy, This Is Money, Virgin and Yorkshire Bank.

Disenchantment with fund managers and charges has led to the growing popularity of Self-Invested Personal Pensions (SIPPs). These are usually group pension arrangements where the legal framework and administration are separated from the fund management.

SIPP facilities are available through Charles Schwab, ETrade, Direct Sharedeal, Hargreaves Lansdown, myBroker, Nothing Ventured, Teathers-i-Deal. Of these only Nothing Ventured seems to have embraced the "family" SIPP ("Headstart") made feasible by the new defined contribution tax regime which allows pension contributions to be made on behalf of minors and non-working spouses.

CONTINGENT ORDERS
Automated dealing instructions make life easier for lay investors to trade, and help to control losses and to consolidate gains.

Limit Orders

A limit order is an instruction to deal at a given price or better. The broker usually either "kills" the order if it cannot be "filled" immediately, or keeps it open for up to the balance of the trading day (good-for-the-day).

A minority of online dealing services will now keep limit orders open for longer than one day. For example, Comdirect holds limit orders for up to 90 days, Hoodless Brennan for up to 14 days, Royal Bank of Scotland Direct Trader up to 25 days for UK stocks and The Share Centre for up to 12 months on its batch dealing service. James Brearley will keep limit orders open for an unlimited period.

Stop Orders

"Sell stops" are available on Selftrade, Comdirect, iDealing, Moneyextra Frequent Trader and The Share Centre. "Buy stops" are currently available on Comdirect and iDealing.

A sell stop is an instruction (valid for a fixed period) to sell a stock if the price falls to a predetermined level (a trigger price). On Comdirect you set a price band rather than a single trigger price. On iDealing you can set a trigger price in combination with a lower-price limit order (known as a "sell stop limit" order), which creates the same effect.

A buy stop is an instruction to buy if the stock price hits a trigger price. It is the inverse of the sell stop and can likewise be set to create a band within which a buy instruction is triggered (see Comdirect and iDealing).

iDealing enables a buying or selling instruction in one stock to be triggered by a price movement in another, which it calls a "two factor sell/buy stop". This is useful where price movements in two stocks are correlated.

The Share Centre offers a fixed price stop loss and a "tracking" stop loss on its Fastrack Service, whereby the stop price shadows the share price as it rises and locks in gains when the market turns down. To guard against the possibility that a volatile bid/offer spread (rather than a fundamental price change) triggers the execution of a contingent trade, you can employ the "stop loss/stop loss tracking safeguard" to disable your stop orders when the spread falls widens beyond a given range.

CUT THROAT PRICES
It is now possible to place a deal at £10 or under on ten share dealing sites. The Share Centre is still cheapest for very small trades, at a minimum of £2.50 for purchases and £7.50 for sales. At a 1% dealing rate, you can buy up to £700 of stock before you hit Hoodless Brennan's flat £7 charge.

Other members of the tenner-and-under club are MoneyeXtra Frequent Trader (£8.50), Share Crazy (an appointed representative of Hoodless Brennan at £9.00); Saga, Egg, Nothing Ventured and Hargreaves Lansdown (£9.95) and IMIWeb, Ample and iDealing (£10.00). Of these, Hoodless Brennan, Share Crazy, Saga, IMIWeb and Ample have zero periodic administration fees.

The question is whether you necessarily sacrifice choice and functionality by opting for a low cost online dealing service. As always the choice of a service provider boils down to value for money, which - in the author's opinion - means a full service (except for advice) at reasonable cost, allied to genuinely useful research and tools.

June 03