Share trading: the choices, the charges, the risks
Stock market flutters should never be made lightly
The sudden drop in markets as the Covid-19 crisis unfolded prompted some people to move their money from cash deposits to investment options that might, just might, yield better returns. Photograph: EPA/ Kimimasa Mayama
Every time the stock market goes into meltdown, people start to wonder if, rather than demonstrating the hair-raising volatility of share trading, it might actually present an opportunity to make a purchase. Even non-professional, casual participants in the stock market know you are supposed to buy low and sell high.
Some evidence suggests retail investors have recently returned to the fold, believing that market values are at or near their bottom – or at least nearer to the bottom than before. It’s a big call to make, of course.
Dutch online trading platform DeGiro, favoured by some Irish investors, has had to implement a waiting list for prospective customers, so eager are they to trade, while among Irish stockbrokers, both Davy and Goodbody have reported an increase in new accounts.
Davy describes this as an “uptick”, stressing that it is not unusual to see one in times of market volatility.
The sudden drop in markets as the Covid-19 crisis unfolded, combined with record low interest rates, prompted some people to move their money from cash deposits to investment options that might, just might, yield better returns.
Goodbody says there has been a fourfold increase in the opening of online trading accounts since the onset of coronavirus, as well as a trebling of client trading online, with a pattern showing 70 per cent buyers and 30 per cent sellers. Those figures would have been more evenly balanced in 2019. Its general contact with clients has increased 50 per cent.
So how do returning investors, or indeed novices to the world of share trading, access the stock market in 2020 anyway?
Afford to lose
Perhaps a better question to begin with is: should you be dabbling directly in share trading at all?
Financial services companies, including stockbrokers, market a range of investment funds that are relatively low risk, yet offer a better return on long-term savings than is available on deposit (which wouldn’t be hard right now). For most people, this is likely to be the more appropriate approach than taking bets on individual stocks or even baskets of stocks.
Investment funds will be tailored for customers’ risk profile, with the less adventurous options offered to the more cautious.
Confident investors who already possess a certain wealth might be drawn, however, to discretionary share trading accounts, where a stockbroker will make investment decisions on their behalf, or an advisory one, where the broker advises them on what to buy and sell.
Tying up cash that might be needed in the short term is another rookie error, as is blind faith in much-hyped, 'fashionable' companies
A lower-cost, yet riskier way to trade shares is through what is known as an execution-only service. This is as it sounds: no advice will be provided. Your bets will be your own to take. So be aware. The notion of being very clever in investment decisions and “winning” at the stock market can be a dangerous state of mind. You have to be prepared to lose too.
And investors must be mindful not to make emotional decisions: the classic mistakes retail investors make is they buy brashly too close to the top of the market, setting themselves up for a loss, or they sell in panic as shares slide, crystallising their loss.
Tying up cash that might be needed in the short term is another rookie error, as is blind faith in much-hyped, “fashionable” companies. As the Competition and Consumer Protection Commission (CCPC) puts it, “the golden rule is not to invest money that you cannot afford to lose”.
An execution-only share trading services means stockbrokers won’t make investment decisions on your behalf, nor will they offer any advice: you’re on your own. So where to go?
Only a few years ago, an investor seeking an execution-only account with a stockbroker based in Ireland could have chosen between Davy, Goodbody, Merrion Capital, Cantor Fitzgerald and Campbell O’Connor, albeit with some of these better suited to the wealthier end of the market.
Their number has dwindled of late, however. Campbell O’Connor, the smallest of the stockbroking firms based in Ireland, wound up last year. Before doing so, it advised clients that they could avail of an automatic transfer to rival broker Cantor Fitzgerald, move their investments to a broker of their choice or liquidate their holdings.
Merrion, meanwhile, became part of Cantor Fitzgerald’s Irish unit in 2018.
It isn’t all one-way traffic, however. Dutch online broker DeGiro is the relatively new kid on the block. It began offering low-cost trading services to non-professional traders in the Netherlands, where it is regulated, in 2013 and now operates across 18 European countries. This makes DeGiro one of the big players for retail investors who fancy their chances and want access to a large number of exchanges, including Euronext Dublin.
If you’re not already registered on its site, however, you will have to do so to “secure your spot” on its waiting list, with the brokerage saying it will notify people via email as soon as they are ready to activate their account. DeGiro said it introduced the waiting list because the volatile market conditions in February and March led to “a surge in new clients onboarding”.
This, combined with certain measures introduced as a result of Covid-19, was affecting its service capacity, it said, bluntly admitting that it was taking “longer to respond to phone calls and emails”.
UK-based options include discount broker Interactive Investor, but changes are afoot there too. As its existing Irish customers should already have been informed by email in April, its Irish website is closing on May 22nd, and accounts will be moved to the main UK-based website, with different terms of service, rates and charges applying (more on this later).
Users of financial technology app Revolut also have limited access to (commission-free) share trading since last year through their accounts, if they so wish. The UK fintech company offers a stock trading feature on its free standard account, through which accountholders can make three free trades a month. It also has a premium account (charging €7.99 a month), through which accountholders can make eight free trades a month. For unlimited free trades, you need a Revolut Metal account (€13.99 a month).
The actual shares users can trade in through the Revolut platform are confined to a selection of US shares, though it has signalled that it wants to expand its service to European stocks. Revolut is one of a number of fintech “disrupters” that says it wants to “democratise” share trading. Whether that’s a good idea, for either Revolut or its accountholders, remains to be seen.
Fees and commissions
There will be a panoply of fees and charges involved in all execution-only trading, though there is a clear gap between the traditional stockbrokers and online-native outfits like DeGiro.
On the execution-only Davy Select Personal Investment Account, for example, there’s a €50 account charge per quarter, although that will be reduced by the amount of the commission paid in each quarter, or waived entirely if the commissions exceed this sum. Commission is charged at a rate of 0.5 per cent for every transaction, subject to a minimum of €14.99.
Physical share certificates are like cheques in so much as they remain in existence, but are very much on their way out
At Goodbody, there’s an annual account maintenance charge of €100 per year, while commission is notably charged at a rate of 1 per cent up to €25,000, with 0.5 per cent applying to the balance, subject to a minimum of €25 per trade.
Cantor Fitzgerald is at the upper end. It has an annual administration fee of €300, with commission on transactions charged at 1.5 per cent on the first €20,000 and on a sliding scale thereafter. The minimum charge is €55.
Under Interactive Investor’s UK charging structure, there are three plans, ranging in cost from £9.99 (€11.40) to £19.99 per month. Transaction charges fall the more investors are prepared to hand over in this monthly charge. Irish investors will also be subject to an additional £3.99 overseas residents’ fee.
DeGiro, which has a pay-per-use policy, will work out cheaper, especially for traders who aren’t terribly active and might have felt brokers’ charges made occasional trades unattractive.
DeGiro’s exact costs will depend on which exchange the shares being traded are listed but, for the sake of argument, if you like the look of a stock on the Euronext Dublin, the DeGiro fee for buying €1,000 worth of such “home market” shares will be just €2.50. Indeed, the bigger cost here will be the stamp duty due on the purchase (€10, or 1 per cent), which is charged regardless of which broker you choose.
The charges and commissions listed above are not exhaustive: others will apply depending on what it is investors are trying to do and the service they expect from their brokers.
Once investors purchase their shares, they can hold them electronically through a nominee account or otherwise in what is known as a Crest personal member account.
Physical share certificates are like cheques in so much as they remain in existence, but are very much on their way out, in large part because of the hassle and expense of later selling the shares.
Davy facilitates share certificate trading, aka paper trading, on all of its accounts, but says the volume has fallen significantly in recent years and is now only a “very small” percentage of its trading.
Almost all paper trades are sales rather than purchases and tend to be made by customers who earned the shares from working or doing business with the company in question, for example through share schemes run by the likes of Kerry, Glanbia, CRH and the banks.
Ultimately, the market is moving away from paper and any new companies listing from January 2023 will be issuing electronic holdings only, Davy points out.
An issue that crops up often, given the long-term nature of many share investments, is that investors responsible for the safekeeping of their share certificate wind up losing it.
This is a cause for annoyance rather than alarm, as the company’s register of members will have the certificate holder’s name on it, and the company can replace the share certificate for a fee. The shareholder will usually have to sign an indemnity protecting the company from any loss result from the issuing of the duplicate certificate.
Tax and stamp duty
The purchase of Irish shares is liable to stamp duty at a rate of 1 per cent and this will be paid through the stockbroker. Euronext Dublin (previously known as the Irish Stock Exchange) has long lobbied for this to be either abolished or reduced to match the UK rate, which is 0.5 per cent. In France and Italy, the rate is 0.2 per cent.
Tax is also payable on any dividends that shareholders receive – although that may not be so much of a problem in 2020 given so many companies have suspended their dividend payments.
There is no stamp duty on the sale of shares, but if you manage to make a profit on a transaction, it may trigger a capital gains tax (CGT) liability, though these can be offset against losses on the sale of other shares in the same year, or unused losses from previous years.
Whichever way it goes, good tax advice will be essential, as the sale of shares will likely add noticeable complexity to the seller’s annual tax return.