Not only are more people becoming stock market investors for the first time in later life, but still more would like to if they only had a clue as to how to go about it. Yet with the growth of online investing, it’s never been easier.
So, why the sudden interest?
Bank and building society rates are the lowest they have been in a lifetime, so many of us, even if we just need a home for this year’s ISA (Individual Savings Account), are looking for better returns than can be achieved by leaving the money in cash.
Additionally an inheritance, or cash released by a property sale, or from a pension under the new rules, can turn many of us into custodians of large sums of money, and we want to make the most of it.
Make no mistake, investing means taking risks with your money. This is not necessarily a bad thing, as long as you are comfortable with the level of risk you are taking, because risk could mean better returns.
Read our guide to risk.
Controlling risk means controlling where your money is invested, and that’s where investing online comes in. You can take command of your portfolio at a moment’s notice and, by doing it yourself, you could save on management fees. Choosing the right account can boost your investments by keeping to a minimum the costs that eat into your returns.
Nowadays there is a wide array of companies and organisations that allow you to buy, sell and manage your investments online. These range from financial advisory firms and online stockbrokers to so-called ‘fund supermarkets’.
Looking after your money yourself and choosing your own investments is called ‘execution only’. That means the company does the deals that you ask it to do without giving you any advice.
Which is best?
Unfortunately, as with choosing a bank account or insurance product, there is no single ‘right’ answer, and the one that is right for you will depend on what you are trying to achieve.
Just as a bank account with the most competitive overdraft rate but no credit interest will be no good to you if you never go overdrawn and keep a large balance in your account, an online investment account that has low dealing costs may not be right for you if you deal infrequently and find that you are then hit with an inactivity fee.
What sort of an investor will you be?
Are you investing a lump sum? Will you buy a range of investments and leave them alone, perhaps drawing income from them? Do you intend to put money aside regularly – saving for a grandchild perhaps? Are you more adventurous and want to trade regularly? A combination of all of these?
Your first step is to decide the type of investor you will be, as that will determine the sort of account you choose.
Confused by all the investment terms and phrases? Read our jargon buster.
What’s on offer?
You can find tables of online stockbrokers and trading platforms and their relative charges online, which can give you an idea. But do check these charges directly with the providers before deciding.
What to look for
You generally get what you pay for. A bare-bones service may be all you need, but a site with research to help you choose investments is worth paying for if you use the information.
If you invest only in funds, as opposed to individual stocks and shares, a ‘fund supermarket’ might suit you better.
How does the platform charge investors? And how much? You need to choose a service that will match your likely pattern of use.
Cheapest isn’t necessarily the best. With the lowest-cost sites you often get a no-frills service. Some charge flat-rate fees, some charge a percentage of the amount invested. Don’t just look at the admin fees or the dealing charges in isolation; look at both together.
Incidental charges could include the cost of reinvesting dividends or trading by phone if you ever want to do this. And check fees for different types of investments, such as shares, investment trusts and funds, which may all vary.
Keep an eye on charges for switching funds or withdrawing your money, too.
Range of investment types
Does the service that has caught your eye do everything you want? Can you buy shares, invest in the range of funds you need and hold investments within, or switch them into – or out of – a tax-free wrapper, for example a SIPP or an ISA?
Also, look at the range of actual investments on offer.
If you are a novice, you would probably prefer a fund managed for you and are unlikely to want to invest on overseas exchanges or dip into other non-standard markets. But make sure that the platform you choose will allow you to invest in these areas if you want to.
What are the different types of investment?
Tools and other features
Are you a tablet or smartphone user and would like to be able to access your portfolio on the move via an app? Some investment platforms offer calculators where you can work out how much you want to save for a particular goal, such as a grandchild’s education, and then track your progress against this goal.
What about a dummy portfolio or ‘stock simulator’, where you can set up a fantasy account and practise trading before you commit real cash? You probably wouldn’t choose an investment platform just to get these kinds of features, but they could be nice to have.
Some sites leave you to get on with it, others have telephone support, web chat, etc.
Some investment websites offer forums and comment features where individuals can discuss their investment strategy and holdings. You should be very wary indeed of these, and never act
on a tip gleaned from a website without a lot more research, as forums are often populated by ‘rampers’ – people trying to stimulate interest in a particular share or market so they can benefit from a rising price.
However, online trading communities can be a useful resource for sharing information, and the sense of camaraderie between fellow investors can make trading fun.
Read Annie Shaw's guide to common investment mistakes.
What if you’re a beginner?
If you’re interested in making more of your money but really fear losing your shirt, it could be worth paying for a – more expensive – ‘advisory’ or ‘discretionary’ service provided by a stockbroker or financial adviser, where, respectively, someone else helps you to choose investments or chooses on your behalf. If, however, you are just a little unsure, you may still be able to go it alone.
Some platforms offer easy ways to invest – ready-made portfolios designed for how much risk you want to take – so you choose one and the firm picks and manages the investments within it.
You can also simply pick one or more passive or ‘tracker’ funds, which will invariably be cheaper to buy than managed funds because they simply follow the movements of a basket of shares that have been selected by a predetermined formula. This is in contrast to depending on the skill of a manager who is trying to beat the market, a service that has to be paid for whether the manager is successful or not.
Need some help getting started? Read our guide to investing for beginners.
Familiar name or start-up?
Some online platforms are offshoots of well-established bricks-and-mortar financial firms. The internet has allowed many new entrants into the field of online investing. Their very newness ensures they have up-to-date technology and they may charge keener fees to entice customers. So don’t immediately rule out a firm just because you haven’t heard of it.
Do your research: make sure the firm you choose is regulated by the Financial Conduct Authority. Use a search engine to look for online reviews or comments about service levels. Check the firm’s regulatory status in the FCA Register and, as with any financial firm where you are handing over money, don’t rely on a snazzy website or even a UK address or phone number – the former could be fake, the latter linked to an accommodation address.
Will your money be safe?
Investment firms that operate within the UK have to comply with rigorous rules about data security and how they hold your money.
When you invest online you don’t hold the investments you have purchased yourself. Instead the online trading ‘platform’ holds your investment in a nominee account for your benefit – or gets a third-party ‘custodian’ to hold it for you – which means your money is ring-fenced from the trading platform itself if anything goes wrong.
Investors using FCA-regulated trading or fund-manager platforms are covered up to £50,000 by the Financial Services Compensation Scheme. You should, however, note that this compensation would be available only in the event of an online trading firm or fund manager being unable to meet its obligations and going into liquidation – and not simply because your investments had returned disappointing results.
For more useful tips and information on investments, visit our money section.