Getting started

How to Invest

Investing can be as simple or as complex as you wish.  Whether you wish to make investments on a regular basis or have a lump sum to invest, there’s a whole industry eager to assist (and invariably take a cut themselves) in the process.  However, competition and the internet has meant that it is now generally much cheaper and easier to invest in the stock market than it was in years gone by.  Furthermore, the availability of information online means that private investors can, if they wish, carry out the sort of research that used to be accessible only to finance professionals.

Nevertheless, it is still possible to transact business the traditional way, contacting an investment provider by phone or post, requesting, completing and returning forms together with a cheque or bank details, and await confirmation of your investment – and hopefully regular updates.  Indeed for many, this may still be the best (and cheapest) approach.

For those who are comfortable with transacting business online, there are numerous investment providers, brokers and platforms competing for your business.  In many cases you should be able to open an account online, deposit funds and make an investment in a matter or minutes.  However, before you rush into things, let’s consider the costs of investing.

Costs of Investing

There are a number of costs which are likely to be incurred during the construction and maintenance of an investment portfolio, some of which will be more transparent than others.

Costs to consider include:

  • Adviser fees/commission
  • Broker administration/management fees – If you open an account with a broker, there will usually be a periodic charge (usually annual) to cover the costs of administering your account.  This may be a fixed amount, or it may be based on a percentage of your portfolio value.  Minimum and maximum fees may well apply.
  • Dealing commission – this may vary according to size and/or the frequency of trades and portfolio value.
  • Stamp duty – This is a 0.5% charge applied mainly to purchases of shares in UK companies.
  • Bid-offer spread – This is the difference between the buying and selling price of a stock at any one time. This varies according to the marketability of the stock, so for heavily traded shares the spread is much smaller than for lesser traded stocks such as those of small companies.
  • “Fund fees” – These are costs associated with the operation of collective investments such as unit trusts, investment trusts and exchange-traded funds.  These are less transparent to investors, but will nevertheless impact the return as measured by the value of the fund and the performance of its underlying assets. An indication of these costs is reflected in the fund’s Total Expense Ratio (TER).
  • Other broker administration fees – These are other charges that relate to the operation of a broker account eg stock transfer fees, withdrawal fees etc.

Taken individually, these costs may not appear to be that significant.  However, they all add up and can make a huge difference to overall returns over the long term due to compounding.  This difference may be magnified still further depending on whether your investments are made in a tax-efficient manner.

Let’s consider the taxes that impact investors and their investments most directly.

Tax

The following taxes will impact investors to a greater or lesser degree:

  • Income Tax – a tax levied on an individual’s earnings, including income from employment, savings interest, rental income, pension income and dividends.
  • Capital Gains Tax – a tax charged on investment profits, typically payable on the sale of an asset such as shares and investment property.
  • Inheritance Tax – a tax paid on a person’s estate if the total assets on death exceed a tax-free allowance.
  • Stamp Duty – a tax payable on the purchase of shares in UK companies, residential and commercial property.

Please note that tax rules and reliefs are subject to change by the government.

So, before you invest anything, it makes sense to consider the tax implications of your investments.  After all, tax is another potential deduction just like any other cost that most investors will wish to minimise.  It may sound alarmist, but a bit of research could save you hundreds or thousands of pounds over time.  An understanding of the taxation of the returns you may make through investing will enable you to invest in the most tax-efficient manner.

However, before we look at how to go about this, I want to describe a simple low-cost strategy that is particularly suitable to those new to investing (or those who want to spread risk but only have a modest amount to invest each month) that does not involve having to search for a suitable broker – regular investing in one or more investment trust investment schemes (share plans).  Click here for further details.

In researching investment trust regular investment plans, you are likely to come across (or be offered) the opportunity to invest within a tax-free wrapper such as an ISA or SIPP.  Although this will give you the benefits outlined in the strategy together with favourable tax treatment, this will usually come at a cost such as an annual administration fee.  You would also still be subject to the disadvantages of a reduced range of investments and the inability to trade ‘real time’.

A way to address both of these disadvantages is to trade through a low-cost, execution-only broker. Click here to find out how to go about this.

Comments are closed.