You can think of stockbrokers as conduits to the stock exchanges. In exchange for a commission on every trade, they send your orders on to stock exchanges and market makers, which actually do the heavy lifting of matching your buy order with someone who wants to sell, and vice versa.
You and I can’t knock down the door to the stock exchanges and make a trade ourselves without a broker. In truth, the stock exchanges as we think of them from their depictions in movies and on TV don’t really exist today. Believe it or not, most trading actually takes place between computers located in dimly lit server rooms.
Just as the process for processing share trades has changed, the terms we use for the people and businesses who facilitate trades has changed, too. Today, instead of using the term “stockbroker” as an all-encompassing term for any person or firm that deals in shares, we generally divide companies into two categories: “discount brokers” or “full service brokers,” labels that better describe what they actually do.
Realistically, the lines between the two types of brokers are slowly starting to converge. Discount brokers now have wealth management services that offer the help of a human advisor at a full-service price. Some full-service brokers also offer a basic level of service at discounted prices.
Ultimately, it comes down to how much service you need and what you’re willing to pay. As self-directed investors who pick our own shares and funds, we’re biased by own our experience — we view the cost savings of a discount broker as being far more valuable than the personalized service of a full-service broker for our own portfolios.
We recognize that one brokerage can’t be the “best” choice for every single investor, so our view is that the best discount broker should thread the needle between offering the most functionality and perks at a price point that won’t break the bank.
The following features were considered particularly important in determining how to rank brokers you see in this list:
The online brokerage industry is still in its early days, but it’s becoming increasingly clear that discount brokers are here to stay. That’s because discount brokers are able to offer 90% of the service and functionality of a full-service broker at a price 90% lower than their higher-cost peers.
Self-directed investors who are capable of choosing their own shares and funds can save a fortune by using an online discount broker. Even today, many brick-and-mortar brokerage firms charge as much as £150 or more just to place a single trade to buy a share. Online discount brokers charge £12 to £15 for the same basic service of placing a trade.
And while discount brokers have a reputation for offering a “no-frills” solution to investing, they’re often matching many of the features you’d expect from full-service brokers. Here are just some of the features that you get from most discount brokers today:
The best brokerage largely depends on how you invest. Investors who invest solely in individual shares and ETFs would want to seek out different features than investors who use funds alone, for example.
Researchers have concluded that an investor should own as many as 30 shares in order to have a truly diversified portfolio. Thus, investors who want to build a portfolio of individual shares may want to focus on the cost of trading, as the difference in price can add up quickly when investors place as many as 20 to 30 trades just to set up their portfolio.
Investors who use funds or ETFs may want to prioritize a broker with a larger selection of funds to choose from. Looking for a broker that charges low fees or, better still, no fees at all, on the funds that you hold.
Of course, convenience also plays an important role. If the bank that you already use also offers a share-dealing service, there are advantages to having both accounts with one institution. Though if that convenience comes at a higher cost — either for share deals or account fees — it’s worth considering just how much the convenience factor is worth.
While some brokers have minimum account requirements, the amount you need to get started as an investor has more to do with what you invest in than where you open an account.
Here’s how we think about the effective minimums for certain types of investments:
Commission prices usually guide investors who are just getting started. Many new investors start with low-fee ETFs as a way to invest in a diversified portfolio with less than £1,000. Once an investor has a sufficient amount of capital, it can make sense to start investing in individual shares and pay the small commission price on every trade.
The table below shows how commission prices scale down as the amount you invest in each stock increases. For example, an investor who pays £12 to buy just £100 worth of shares would incur trading costs of 12% of the amount they invest.
|Amount invested||£15 commission per trade||£12 commission per trade|
Importantly, you incur a commission to buy and sell individual shares and ETFs that are not commission-free. We like to think about trading costs in terms of how much an investment would have to appreciate in value to cover the cost of buying and selling it.
If you pay a £12 commission per trade, and buy £1,000 worth of shares at a time, the share would have to appreciate by just 2.4% to pay for the trading commissions. However, if you were buying £100 worth of shares at a time, the share would have to rise by 24% just to pay for the commissions.
This is why investors tend to stick to low-fee ETFs while accumulating assets. On small amounts of money, avoiding commissions is often the best way to generate a higher return after all the costs are taken into consideration.
Online brokers make buying shares online as easy as typing in a few numbers and letters and making a couple clicks. To buy a share, all you need to know is the company’s ticker symbol, which typically just a few letters long. For example, Marks & Spencer Group’s ticker symbol is “MKS,” GlaxoSmithKline’s is “GSK,” and Sainsbury’s is “SBRY.” (If you don’t know the ticker for a given stock, most brokers also allow you to type in the name of the company to find the ticker on the order page or in the broker’s trading platform.)
Your broker will ask what kind of trade you want to make when placing your order. The first type of order is a “market order,” which is essentially an order to buy a share at whatever price it takes to find sellers who want to sell enough shares to fill your order. You can think of this order as a time-sensitive order, where getting the order filled quickly takes precedence over the price at which your shares are bought or sold.
The second type of order is a “limit order,” which is an order to buy or sell a share only at a specified price. Shares of Rolls Royce (RR.) recently traded for 883p each, but you might only want to buy it if it falls to 800p or less. Placing a limit order to buy Rolls Royce shares at 800p per share tells your broker to buy the shares only if you can get it for 800p per share.
If you’re stuck on which type of trade is better, it’s a good idea to default to a limit order. That’s because you can have the certainty of knowing the price before the order is completed. In contrast, there’s no way to know with certainty at what price you will buy or sell share if you use a market order.
When trading less popular shares, market orders can be simply dangerous. If you place a market order to buy 3,000 shares of a share that only trades 100 shares a day, your order could easily move the price higher by several percentage points, forcing you to pay more than you wanted to for the shares.
Trading volumes are the highest in the first 30 minutes of a trading day (8:00 to 8:30 in London) and in the last 30 minutes of a trading day (16:00 to 16:30 in London). So, if there were ever a “safer” time to place a market order, the first and last 30 minutes of the trading session would be the time to do it.
Here at WalletHero, we provide expert reviews that highlight the things that actually matter when making decisions that affect your personal finances. We’ve published thousands of articles on sites well-known sites around the world, and sometimes we even get talked into putting on a tie to appear on TV networks. But don’t worry: You’ll find that our reviews are all jargon-free and written in plain English. As investors who manage our own portfolios through online brokerage firms, we have personal experience with many of the most popular online brokers which informs our view on brokers, how they compare, and pitfalls to look out for.