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How to Invest

Stocks and Shares

To buy and sell shares you will need to use the services of stockbroker. Today, many high street banks and some building societies offer stock broking services, so it is a good idea to shop around and speak to a number of brokers about their services and charges before you choose one.

Types of Service

Stockbrokers offer various services, which can be broken down into three broad categories:

  • Advisory - the broker will give advice on request, although final investment decisions are left up to you.
  • Discretionary or portfolio management - the broker manages your portfolio of shares and has your authority to buy and sell shares for you when he sees fit.
  • Execution only - the broker buys and sells shares, on your instruction, without giving you any investment advice.

The service you choose will depend upon your confidence and experience as an investor. As a rule, the discretionary service is the most expensive because you are paying for the broker's time and expertise.

The cheapest service is normally a ‘no-frills' execution only service. Using a stockbroker costs from around 1 - 1.75%, with charges reducing proportionally as the value of the shares involved increases.

However, there are even cheaper alternatives if you are prepared to shop around and execution-only services made available via the internet are set to reduce costs further. You will also have to pay stamp duty of at least 0.5% which is added to the cost of all shares bought. The broker then pays this to the Government.

Some brokers charge for advice, which might be a flat annual fee for unlimited advice or a fee for a limited number of pieces of advice. Others include this in their commission charges.

If you choose an advisory or discretionary stockbroker, you will receive a client agreement letter. The broker must send this letter and set out the services offered, the types of investment, which are suitable for your requirements and the terms under which the broker will buy and sell for you.

A number of stockbrokers now offer the facility to buy or sell shares using the internet. These services are competitively priced as the brokers pass on the savings from handling the transactions electronically rather than in paper.

Buying and Selling Shares

In most circumstances this will just be a matter of picking up the telephone or accessing the internet and telling the broker in which company you wish to buy or sell shares, the quantity you would like and the price you are willing to accept. Your broker will then buy or sell those shares for you promptly at the best price available in the market or wait until they have reached the price that you have specified (known as a limit order).

Some brokers offer a cheaper dealing service by post, but this risks requests being lost or delayed and possible sharp fluctuations in share prices before your request reaches the broker.

Currently there are two systems by which shares are bought and sold in operation in the UK. There is a traditional ‘quote driven' system in which investors will approach a broker to ask the price of a particular company share and to make a transaction on their behalf. The broker then buys the shares from or sells them to a middleman known as a Retail Service Provider (RSP) who sets the price at which he is prepared to deal. However, for the majority of shares in the FTSE 250 an ‘order driven' system is in place.

When dealing through the order book, investors place orders through their stockbroker to buy and sell shares at a price which they dictate. The orders are then input and displayed on an electronic order book and matched automatically. The order driven system allows investors to take greater charge of their portfolios and to set ‘limit orders' because instructions to buy or sell at a certain price will be carried automatically whenever the system finds matching orders at the appropriate price.


After the shares have been bought or sold, you will receive a contract note with the details of the shares purchased or sold on your behalf, including the price at which the transaction took place. The stock market works on a three day rolling settlement basis.

This means that the broker pays the seller for shares you have bought or pays you for shares you have sold five days after the transaction is made. If you are buying shares you have to make sure that you supply your broker with the money in good time to meet this deadline for settlement.

When you receive the contract note from the broker, you should respond immediately and send payment, although many brokers now hold cash and shares on behalf of clients to allow speedy settlement.

If the shares that you wish to sell are held in a broker's nominee, the proceeds from the sale will either be credited to your bank account, the account that you hold with your broker or sent to you by cheque within the settlement period.

If you hold a share certificate, you will be required to sign a transfer form and return it to your broker, along with your share certificate, in good time to allow the broker to make the shares available to the purchaser, normally within five days. Until the broker himself receives the funds he cannot make them available to you.

Some brokers offer a dealing service with a non-standard settlement of longer than five days (usually ten days). Also some brokers will accept payment by credit and debit cards and by Direct Debit. It is worth asking different brokers for details of the various services available and the charges involved.

Holding Shares

There are three main ways in which you can hold shares. Under CREST, the electronic settlement system introduced in September 1996, it is simpler to hold your shares through a broker's nominee account. If you choose to do this, the broker's name will appear on the company share register instead of yours. You should, however, receive regular statements and valuations from your broker and many nominees offer other administrative services such as calculating tax liability so, again, it is important to shop around.

Do check that you are able to gain access to annual reports, details of shareholder meetings and rights issues etc. because these are not automatically available to those holding shares through a nominee. Personal membership of CREST allows you to retain legal ownership of your shares as well as the benefit of speedier CREST settlement.

As a personal member, you will be an individual member of CREST for ownership purposes, but your broker will carry out all the necessary settlement and transfer arrangements.

It is still possible to hold shares in certificated form, although you should check with your broker in case the charges are higher for any dealing in shares you may want to undertake. Your purchase will then be registered with the company whose shares you have bought and you will receive a certificate in your name with the quantity and description of the shares you own.

Existing share certificates are not affected by the introduction of CREST.

New Issues

A new issue happens when a company sells its shares on the stock market for the first time in order to raise money. Nowadays, only a few large issues are sold directly to the public. Investors wanting to buy shares in newly listed companies can either buy them in the normal way when trading starts or try to obtain an allocation at the outset, in the new issue, by using the services of a stockbroker.

Several stockbrokers have developed special services to obtain allocations of new issues for their customers.

Collective Investments

Investment Trust Companies

Investment trusts are collective investments. You buy a share in an investment trust like any other company listed on the stock market and it then invests in the shares of other companies. The price for investment trust company shares is determined by the demand for those shares and their share prices are listed in the national press.

Your stockbroker will buy and sell investment trust company shares and the same processes and settlement dates apply as with all other shares.

You can also buy investment trust company shares through savings schemes. Many of these schemes offer minimum monthly investments of as little as £25, making them simple and cost effective for first time investors. To make things easier, the shares from these savings schemes are held in a nominee and regular statements are sent to you. A list of investment trusts and who manages them, along with contact details is available by visiting The Association of Investment Trust Companies.

Unit Trusts

Like investment trusts, unit trusts invest in the shares of other companies. Unlike investment trusts, the price of units is determined solely by the value of the underlying investments held by the trust. Many brokers and other investment houses run their own unit trusts.

Units can be bought direct from the unit trust manager, or through a third party such as a stockbroker or Independent Financial Adviser. There is no fixed settlement period for buying and selling units, but normally you will have to provide payment up front for your units and you will then receive written confirmation of the number of units you hold in the trust. You will see two prices quoted for unit trusts.

The difference between the higher price at which units can be bought by investors and the lower price at which they are sold (the spread), reflects the initial charge for buying the units and management charges, as well as the spread of the underlying shares.

Open Ended Investment Companies (OEIC's)

Recent changes in the law in the UK have allowed the creation of OEIC's which have been operated for some time in the USA and Europe. An OEIC is similar to a unit trust in that the number of units can be increased or decreased according to demand. However, like an investment trust, the investments are held in a company and units are purchased or sold at a single price.

Units can be bought direct from the OEIC manager, or through a third party such as a stockbroker or Independent Financial Adviser. There is no fixed settlement period for buying and selling units in an OEIC, but normally you will have to provide payment up front for your units and you will then receive written confirmation of the number of units you hold in the OEIC.


Gilts are loans issued on behalf of the government to fund its spending and are also known as government bonds. Gilts can be bought through a broker, where similar commission charges will apply as with all other investments. It is also possible for individual investors to buy gilts through the Bank of England, where an ‘execution only' postal service is available and the rate of commission is normally lower than through a stockbroker, particularly for smaller transactions. Another advantage of buying gilts through the Bank of England is that interest will be paid gross i.e. without any tax deducted.