Our beginners' series takes a look at what a stockbroker does and why you need one.
In the last instalment of our beginners' investing series, we took a look at what a share is. It's a part ownership of a business -- it really is as simple as that.
But if you want to buy into a business, it's no good knocking on the head office door at, say, Vodafone (LSE: VOD), and trying to hand over your investment cash. No, you need to buy the shares on the stock market, and for that you will need the services of one of the UK's stockbrokers.
A broker acts as your go-between with the market, which is typically the London Stock Exchange (LSE: LSE), itself a company that you can buy shares in. Your broker pools and matches the orders from whoever is wanting to buy and sell at the same time, helping keep costs down. Today's technological world means you can carry out your share dealing online, and these online stock brokers also serve to hold our shares for us, in what is known as a nominee account, doing away with the need for us to keep track of paper share certificates.
What it will cost
For this, a broker will charge a fee, naturally. For example, the Fool's ShareDealing service will charge a flat £10 when you buy or sell UK shares online, regardless of the amount you are investing. Today's low broker fees make it economical to invest relatively small amounts, meaning that just about anyone who can save some money can buy shares.
But there are two other costs that need to be covered. One is the market's own profit, and that is found in the buy/sell "spread" when you look at a share's price. For example, a quick look at Unilever (LSE: ULVR) shows two prices quoted, 2,063p and 2,062p (it will probably have changed by the time you read this). The 2,063p is the price you have to pay to buy a share, and 2,062p is the price you'll get when you sell.
There is only 1p difference, which is pretty negligible really, and that shows a cost benefit of investing in companies that are well traded -- we refer to it as "liquidity", and the greater the volume of shares traded (the greater the liquidity), the lower will be the spread, generally.
As a contrast, if I look at a smaller and less well-traded company, Coastal Energy (LSE: CEO), I find a spread of 975p-1,000p. Here there's a difference of 25p, and if you invest, you'll need to make 25p per share just to break even on the price.
Can't avoid taxes
The final cost is stamp duty, of 0.5%, payable when you buy shares (but not when you sell). Many people, including me, think that this tax is unjust, and that people should not be taxed for wanting to invest for their own futures. But we're stuck with it, and at least it's not very high.
So, to sum up, you need an account with a stockbroker, who will buy and sell shares on your behalf and will keep your shares safe for you. The broker will charge you a modest fee for this service, but you will also have to cover the costs of the market spread when you buy and sell, and pay some tax whenever you make a purchase.
Next time, we'll go through the actual steps of setting up an account, and buying and selling shares, using TMF ShareDealing as our example broker.
More in the Investment For Beginners series:
