How to build an online self-select ISA
Ask any of the nine million over-35s polled recently on what they would advise their 20-something selves and a resounding chorus of ‘pay attention to your finances’ will be the advice that you will hear.
It’s hardly sex, drugs and rock and roll when you’re a twenty-somthing, but it moves higher up in the agenda when it comes to a decent standard of living as we get older.
As things stand, the markets are under the grip of some tumultuous Euro politicking, and there is a tremendous squeeze on incomes due to wage freezes and high inflation.
You may no longer be a twenty-something, but it is never too late to start putting in place the best financial practices.
It definitely makes sense to take a hard look at our finances in these times of uncertainty to help them pay dividends in the long run.
ISAs have long been a staple in a saver’s arsenal against the tax man. These tax-free options are a relatively easy way of squirrelling away money every year. Left over a long period of time they can grow to be a substantial sum that could make purchases or retirement much more financially comfortable.
Every adult in the UK is allocated an ISA allowance each tax year, ending April 5th. You can save up to £11,280 this tax year, either by investing the entire amount in a stocks and shares ISA or split it and put up to £5,640 in a cash ISA (Read more on the rules and regulations governing ISAs).
Thanks to a new growing market of online ISA providers, it is now easier than ever to get set up online, something which typically offers far lower dealing charges than the City-based stockbroking firms.
Most online brokers offer a simple, no frills ‘execution-only’ service, which basically mean they do not offer advice on which shares to put, or not, into your tax-free wrapper.
Customers have to deposit money into their account, and the brokerage firm will use this to carry out transactions on your behalf. You also have the option of dictating how high you are willing to go for the price of a particular share, as you would with a traditional broker.
Typically your shares are held in a nominee account, which means you don’t receive the share certificates or have any voting rights. But this can reduce the paperwork involved with share ownership. However, the shares are still in your name, and most importantly – you are still the recipient of the dividends, should there be any.
Although these online services have reduced stockbroking charges, there are still a range of fees customers have to pay. This will include set-up fees, ongoing administration costs, plus the trade charges imposed each time you buy or sell a share.
There will be differences in the ways these firms charge these fees (some will charge a flat sum, others a percentage cost) so think about how you plan to use the account when comparing costs, otherwise they could take a sizable chunk out of your investment.
Some of the best rates are offered by the smaller, lesser known names but, as with any kind of transaction, pay careful attention to the small print and check there aren’t any extra hidden costs. Also remember to look closely at any offers that seem too low, this may be an introductory offer and subject to change early on.
The first thing investors should check is whether the firm is properly authorised by the regulator, the Financial Services Authority (FSA).
This will ensure your money is properly protected and ring-fenced from the company’s own assets.
Remember rogue traders can dress themselves up as brokers, so make sure the site is listed on the FSA’s website (fsa.org.uk), otherwise you will run the risk of becoming a victim of investment scams and will not be covered by the Financial Services Compensation Scheme (FSCS).
While most online brokers don’t offer advice, they usually provide a range of additional information, such as share-price graphs and company reports, and archived news about the company.
This information will be useful when making you choice of shares and allow you to effectively monitor your portfolio, but check whether there are additional charges for such services. Also remember that by having up-to-the-minute data at the click of a mouse, some investors will be prone to ‘short-termism’.
The last few years have been a rocky ride for the markets, and investors could soon become agitated at the daily ups-and-downs of a market wholly sensitive to sentiment. Online customers need to sit back and wait, and give an investment enough time to prove itself. Typically, financial advisors would recommend that you give your investment over 5 years to fully see through any market volatility.
When selecting a portfolio you need to think about your investment objectives and consider your attitude to risk. People’s tolerance to risk generally declines with age, but there is also an increased tolerance to risk the wealthier the customer.
Young people have many years of earning potential ahead. They should take more risk, not less, because they will benefit from compound interest.
Risk can be a powerful motivator (or de-motivator) in an investor’s arsenal and it is important to be honest with yourself about the possibility of losing capital. The current economic climate may make you feel that this is not the best time to invest, but stock market investments as part of an ISA should take a longer-term view.
Those looking for a self-select ISA should consider the following:
Charges – Look at both dealing costs and administration charges. The cost of buying and selling shares varies between providers, but remember most brokers will also offer discounts on their dealing charges for more active traders.
Administration charges also vary between broking services. Some providers charge a quarterly account management fee and others charge annually. If you feel that you will not trade frequently, it may be a good idea to see if the broker charges an inactivity fee, as this too will eat into your investment.
Tools – Investors need good tools to track the performance of individual shares, sectors and their own portfolio, as well as researching price history. Look at whether there are extra costs for accessing the broker’s charts, graphs, tips, and news. Also check the broker’s website and make sure it’s easy to navigate around.
Live prices – Most stockbrokers now show the real time prices, but it’s worth checking beforehand as some online services will have a 15-minute delay from the trading floor.
Markets available – If you are looking at having an international portfolio, or like the idea of a holding a wide spread of investments, you should check the broker offers access to a wide range of markets.
Dividends – Typically you can opt to have them reinvested or paid into your current account. Reinvesting usually incurs an additional cost but can work out cheaper in the long-run, and prove to be a smart way of boosting your existing investment.