Beginner's guide to investing

Lokolo

Lansdowne wrote: »

H-L and Chartwell don't charge a purchase/sale fee because, as has been said, they make their money from the part of the annual commission not refunded to you.

How do they charge you? I've got another 3/4 months until my first year investing has been completed - do they just send me a bill or do they sell units of mine to pay it?

Aegis

Lokolo wrote: »

How do they charge you? I've got another 3/4 months until my first year investing has been completed - do they just send me a bill or do they sell units of mine to pay it?

It's incorporated into the unit cost on a daily basis, so there's never a bill for the annual charge.

zedyy

will read this thread later

william_G_4

scwal wrote: »

Hi,

Seeing as though interest rates have plummeted and putting cash into savings accounts becomes less attractive, I possibly considering investing in stocks/shares, particularly because they are relatively cheap (?)

However, being a complete novice, would really appreciate some advice on a couple things:

1) How do you actually go about buying shares/unit trusts/ETFs etc? Are there any good sites or books that you can recommend which is bit of an idiot's guide into the nuts and bolts of actually beginning to invest?
2) I'm thinking of using my stocks + shares ISA; I've currently put £3600 in a cash ISA for this year; does this mean I can put a max of £3600 into a S&S ISA for this tax year? This is probably the max amount that I'm thinking of investing.

Any initial bits of advice/recommended reading would be much appreciated!

There are a number of online 'execution only' brokers out there if you want to try your hand at direct investment via a nominee account in shares or bonds. Fees vary but an often higher trading fee can be offset by no 'inactivity' charges.

Just google 'execution only online brokers' and compare.

If you want to try this route then it's worth thinking about how much you want to 'nurse' your portfolio. On low capital, trading costs can seriously erode your returns so a 'buy and hold' mentality makes more sense as opposed to a 'trader' mentality.

Remember as well that you need to factor in the 'sell' costs as well as the 'buy' costs before you break even and move into genuine profit. To do this you need to divide your buy (trading cost plus stamp duty) and your sell (trading costs) added together by the amount of shares you bought. Only when the shares reach this marginal cost will you be in REAL profit.

I would humbly recommend a copy of the FT Guide To Investing as a starting point if you want to get a flavour of the mechanics involved.

Over-trading is the quickest way to wipe out your returns on a small portfolio.

If the money you are thinking of investing is vital to your future then I would suggest staying away from direct investment and limit yourself to an investment fund for now or even stick with cash on deposit. The returns are very low but the risk is (virtually) zero. A fixed period high(er) interest savings account may also suit your purpose if liquidity is not a problem for you.

If however you have some 'speculative' or disposable income that you are willing to write off then now seems as good a time as any to get involved.

Make sure you read up and fully understand the concepts of stop-losses and trailing stop losses for damage limitation purposes(which the pages of any brokerage site will explain)

I've recently taken a step into shares myself and have been astounded at my short term returns against cash rates but I'm involved with money that I would otherwise have spent in the pub and so doesn't really exist (apart from in a keg somewhere in Dublin). Would I be so bold on money that formed part of my 'core' earnings?

Probably not.

Caveat emptor

Will

thelawnet

Lokolo wrote: »

How do they charge you? I've got another 3/4 months until my first year investing has been completed - do they just send me a bill or do they sell units of mine to pay it?

It's all done covertly.

Fund managers have historically got business by using salesmen (IFAs and other financial advisers). Rather than present the client with a bill of £600 up front for their time, they instead take the money out of the client's investment.

It amounts to exactly the same thing in the end.

There are two kinds of charge on Unit Trusts (and OEICs, which are very similar, but the prices are quoted differently).

The first is the initial charge. This usually is 5 or 5.25%. This goes to the person or company selling the fund straight away. It's not a charge made by the fund, it's just commission.

In other words, you send £1,000 to the fund company, they send £50 to your IFA. So you have in fact only invested £950, and spent £50 on commission.

Many advisers will not charge the full amount of commission, and sites like Hargreaves Lansdown do not need to charge it all, because they are running a low-cost website, not an individual advice service.

The second is the annual charge. This is typically 1.5% on funds other than gilt and tracker funds. This looks like the annual charge for running the fund. In fact it is not. The 'Total Expense Ratio' is the actual annual charge. This number, which will be slightly higher, includes trustee fees for holding the money and so on. For Invesco Perpetual's High Income Fund, it is 1.68%.

http://www.h-l.co.uk/funds/security_details/sedol/3303148

The 0.18% on top of the 1.5% is variable, since it represents actual costs incurred. The 1.5% on the other hand is a fixed charge.

This money is taken out of investors' capital over the entire year. Since it is taken continuously, it does not cause sharp fluctuations in value.

It's very rarely discussed where the 1.5% actually goes, but when Hargreaves Lansdown did their IPO they obviously had to publish this in their prospectus: https://www.h-l.co.uk/offers/download_prospectus.pdf

"Renewal Commission

This represents a share of the annual management charge earned by the fund provider. The renewal commission is calculated as an agreed percentage of the value of funds held on the platform, typically 0.7 per cent. per annum. Often, a proportion of the renewal commission is rebated to the client as a loyalty bonus (this arrangement does not occur with Vantage SIPP assets). By way of example, in respect of December 2006, renewal was earned on qualifying funds of £4.8 billion (73 per cent. of Vantage assets under administration) at an average rate of 0.7 per cent. and rebated to
clients at an average rate of 0.2 per cent. In the financial year ended 30 June 2006, renewal commission represented 63 per cent. of Vantage revenue."

I believe the 0.7% is normally made up of 0.2% for the fund platform (which is the system created to manage actual investments), and 0.5% for the adviser. But in this case Hargreaves Lansdown control both, so they get 0.7%.

Of this they typically rebate 0.25%, but sometimes less.

According to Hargreaves Lansdown's own figures then, the typical annual charge that they are effectively levying is 0.5%. They are not levying it themselves - the money comes from your investments, and the investment companies then kick it back to them. But it amounts to the same thing.

So for the High Income fund above, each year you pay:

0.80% - for Invesco Perpetual's staff costs, profits, etc.
0.18% - for Invesco Perpetual's costs incurred to third parties.
0.45% - for Hargreaves Lansdown providing you with a website, regular glossy newsletters, etc.

Some funds you will notice have much lower annual charges.

E.g.:

http://www.h-l.co.uk/funds/security_details/sedol/3111095

Here the annual charge is only 0.3%

There is no adviser commission in this, and I think no wrap/platform commission either, but I'm not sure, because the fund management business is very secretive about this.

But if you want to invest in it with Hargreaves Lansdown, they'll charge you 0.5%. Which sounds bad, but is actually the same any other fund - it's just smoke and mirrors - either pay 0.3% annual charge to the fund manager plus 0.5% commission to HL, or pay 1.5% to the fund manager, of which 0.7% goes to HL who then give 0.25% back to you. [If you invest with M&G direct for their tracker fund, you only pay the 0.3% of course and no up front charge - but their other funds are designed to be sold through a salesmen, and so even though they could, they won't reduce the costs on these, because it would annoy their commission earners (IFAs and so on)]

Anyway, for some reason actively managed funds always seem to pay trail commission, the client cannot avoid it.

In actual fact, aside from the annual charge, there is another set of costs involved with unit trusts and OEICs. These are the trading costs. A actively managed fund will often turnover (buy and sell) its entire portfolio several times in a year, and the stamp duty, buy/sell spread and commission paid in doing so, would dwarf the charges. Of course the purpose of doing so is to increase your return; unfortunately generally speaking while active trading may make more money, the costs are a killer, and paradoxically an investment manager that seems to do less (i.e. trades less) to earn his annual charge is likely to be more effective than one who is very active.

BTW, all of these charges come out your capital, you do not pay a bill for them as such, it just eats away at your investment.

scwal

Thank you all for replying to my original post, I wasn't expecting so many detailed answers so quickly! Think I'm going to investigate the unit trusts option for this tax year. I'm definitely in this for the longer-term.

Just a few additional questions regarding investing within an ISA; if I decide to drip-feed into an unit fund (eg. £500 a month), I can only invest ~£1000 until April and therefore not fully use my ISA allowance for this tax year.

In addition, can I use the ISA allowance across more than one broker, eg £1800 with Hargreaves Landsdown and £1800 with Chartwell?

Thanks!

sh856531

In addition, can I use the ISA allowance across more than one broker, eg £1800 with Hargreaves Landsdown and £1800 with Chartwell?

I know that you can have your cash ISA with one provider and your S & S with another, but I don't know if you can split your S & S between two providers. I don't think you can with a cash ISA so I have a feeling that you probably can't with stocks and shares either.

I could be wrong though....

S

Aegis

sh856531 wrote: »

I know that you can have your cash ISA with one provider and your S & S with another, but I don't know if you can split your S & S between two providers. I don't think you can with a cash ISA so I have a feeling that you probably can't with stocks and shares either.

I could be wrong though....

S

You can't, at least not in the same tax year. Not without actually transferring your current ISA to a new provider.

Primrose

Like sh.... I'm pretty sure that you can't split your ISA Cash allocation or your equity ISA allocation between two providers although of course you can have your cash ISA with one institution and your equity ISA with somebody else. You have to provide your National Insurance number with each application and I suspect this is because the providers may have to account for them with Customs & Revenue to ensure that they are not over subscribed each tax year, even though this is a tax free allowance. If you want to go with two different equity brokers, and there's no reason why you shouldn't, apart from making your life more complicated and perhaps not earning so many loyalty bonuses, you will probably have to place your equity ISA with each of them on alternate years.

scwal

Many thanks!