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Getting started
Stockbroker truths |
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Brokers want your business. The unscrupulous ones (more than you may think) will say almost anything to get it. Others will try to bribe you to sign up with cheap offers, but their service may be incompetent. Be wary. Read the few paragraphs below before you choose your broker.
Online brokers
The online broker advantage
Users of the Bargain Hunters' Investment FlexiSystem select their own stocks, although they may take into account the views of others.
Does this describe you? If so, you are better off using an execution-only stockbroker, which will execute your order without giving advice. The majority of these now operate online.
Online brokers have four practical advantages. They are cheap; they are accessible to some extent 24 hours a day; they offer a fast service; and they will deal in small sizes.
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Online
broker check list
Back
up service: check that your broker offers a telephone dealing service in case of system failure.
Security: check that your broker is using 128-bit encryption software. This is a powerful
version of the software that scrambles (for security purposes) information passed between you and the broker.
Dealing costs: find a suitable charging structure. A broker with no minimum commission
will usually charge less for small deals but more for large ones. This is good if you deal in small
sizes. A broker with a substantial minimum commission will work out cheaper if you invest in large sizes.
Limit orders: use a broker that accepts limit orders. These are when you instruct your
broker to deal at not more (or less) than a specified price.
Dealing hours: check if your broker deals outside London trading hours, if you want this.
Fantasy trading: some brokers offer a facility for mock trades. This can be good practice,
although it is no substitute for the real thing.
Financial news and data: the quality of such provision varies between brokers, but
is improving all the time. Similar material is usually available elsewhere on the Web.
One-stop financial shopping: brokers are becoming more like banks. Check that your
broker offers, for instance, a good rate of interest on your cash balance. Some offer cheque books.
US and other foreign dealing: Facilities vary between brokers. If you plan to deal a lot in the US, consider opening an account with a US broker.
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Advisory brokers
Advisory brokers -- a moveable feast
If you have lost heavily in recent markets, you may be tempted to use an advisory broker. Some such brokers are incredibly useful. They will hold your hand when markets are in turmoil,
and will give ethical, sensible recommendations tailored to your needs. If you find such an advisory broker, hang onto him. This is rarer than you might think.
As a rule, the smaller a player you are, the less easy it is to find a good broker. The best brokers for small clients often operate in the provinces, rather than London. Here they have less overheads and a more leisurely working life.
Avoid the dud advisory brokers
The most accessible brokers are self-employed, splitting commissions earned with their firm. Some such brokers are reliable, but many are ignorant about the stock market. They may have been trained in dubious sales techniques at licensed dealers in securities, the downmarket alternative to stockbrokers that had mostly died out by the early 90s.
Keep suspicious
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The dodgy brokers
trade as often as possible, regardless of whether it is in your interest. They
may try to persuade you to sell one stock to reinvest the proceeds in another.
If a broker can manipulate you into suggesting the move yourself, he or she cannot
so easily be accused of churning, which is excessive dealing to generate commission,
a practice forbidden under the rules of the Financial Services Authority.
The sharp operators will hint – without stating for certain – that a stock is
expected to rise enormously in the near future. This way, they will in practice
be covered if the client later complains. Do not allow yourself to be misled
by their practised techniques.
Do not rely on the regulators to protect you against dubious stockbrokers.
Some sharp operators slip through the net. Some operate from offices in secret
locations abroad, using a telephone switching office to handle customer calls.
Such bucket shops use the Internet combined with telesales to sucker investors
into buying dud shares. The pretext is often the IPO of a young high-tech company.
Once the broker has your money, it no longer wants to know. Visit the web site
for McWhortle Enterprises (www.mcwhortle.com)
as a nerve-wracking but absolutely safe lesson in what I am saying. |
Always have a reason for buying a stock
Never buy a stock unless you have thought about it first and have a reason for buying. If your broker pitches you, put down the phone for 20 minutes, and consider. Do your own research on fundamentals, and do not be afraid to ask your advisory broker awkward questions. Look for cash flow, profits and a track record – without too much creative accounting to smooth the edges.
Avoid the pump-and-dump
The less scrupulous
penny share dealers operate the pump-and-dump. The promoters
buy their own stock cheaply through a nominee account from a perhaps respectable
name in the City that wants out. Their professional sales teams then offload
the vast
bulk of this stock to private investors, and the price soars. Suddenly
the promoters will sell their holdings, and everybody rushes to follow suit,
too late. Avoid.
If you buy penny shares, stay in the driving seat
If you must dabble
in penny shares, use only brokers from
UK regulated firms.
Choose what you buy and when, and don't let the City manipulators make the choice
for you. Avoid
buying shares that are not traded on the Main Market or the Alternative
Investment Market, unless you have specialist knowledge or are a gambler. Do
not rely on the tip
sheets.
Essential further reading
If you want to find out more about how to select an online stockbroker, you must
read Everyone's Guide to Online Stock Market Investing, by Alexander Davidson, published by Kogan Page.
More general advice on stockbroker selection is available in How
to Win in a Volatile Stock Market, by Alexander Davidson, published
by Kogan Page.
To find out more about how to beat the City at its own game and select winning
shares, buy Stock Market Rollercoaster,
by Alexander Davidson, published by John Wiley. This dynamic novel is based
on the author's own experience of stockbroking and investment banking. It will
very likely prove the best investment that you ever made.
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