What is a trading platform?
A trading platform offers investors a means of buying and selling shares, funds, investment trusts, exchange-traded products and other assets directly, rather than indirectly through a financial adviser. It is sometimes referred to as a DIY investment platform, online brokerage account or share trading account.
In its simplest form, a trading platform facilitates these trades online and some providers support these services with telephone and/or app-based dealing options. Investors are also able to view their investments in real-time, enabling them to monitor their portfolio and make investment decisions.
What type of trading account should I consider?
Tax treatment depends on one’s individual circ*mstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of advice.
We’ve looked at general trading accounts that allow you to buy and sell shares and other investments, however, there are a variety of tax-efficient alternatives. We’ve also produced guides to our pick of the best Individual Savings Accounts (ISAs), Self-Invested Personal Pensions (SIPPs) and Junior Stocks and Shares ISAs (JISAs).
These accounts are types of ‘tax wrappers’, allowing you to pay no income tax on dividends and no capital gains tax on any profit made on buying and selling your shares. However, in the case of SIPPs and JISAs, you will not be able to access the money until you reach a certain age.
In addition to general investment accounts, some of the platforms we’ve listed also offer ISA and/or SIPP accounts.
How do I open a trading account?
The account opening process can usually be carried out online and the major platforms state it should take around 10 minutes. You’ll need to provide some basic information, such as bank account details, debit card details (for a lump sum investment) and your National Insurance number.
You may have to supply further documents to support the verification of your identity, although these checks may be carried out electronically during the initial application process.
When these checks are complete, and funds have been received into your account, you will be ready to start trading.
You can trade UK shares on a real-time basis from 8 am to 4.30 pm when the London Stock Exchange is open. After logging into your account, search by company name or ‘ticker’ (for example GSK for GlaxoSmithKline) to select the share you want to buy.
How much money do I need to open a trading account?
This depends on the platform, but several allow you to open an account with as little as £1, or £25 per month for platforms offering a monthly investment option. However, you will likely need to add further funds to the account, depending on the cost of the investment you’re looking to purchase.
How does monthly investing work?
Some of the platforms offer monthly investing, usually with a minimum of £25 per month. You set up a direct debit to transfer the money into your trading account on a monthly basis, which is used to buy the maximum number of shares possible each month.
If the share price is higher than the funds in your trading account, the money will accumulate until it is sufficient to buy at least one share.
Monthly investing allows you to benefit from ‘pound-cost averaging’, which tends to smooth out the fluctuations of the stock market as you pay the average price of the investment over the period.
It’s worth checking the trading fees on monthly investing. Many of the platforms charge no, or a lower trading fee, for this option. If this is not the case, the share trading fee can become disproportionately expensive for smaller monthly contributions.
What fees will I pay?
There are various types of fees charged by trading platforms:
Share trading fee
This is a flat fee charged by the platform each time you buy or sell shares. Some platforms charge no share trading fee, while others may charge between £4 to £12 per trade. Trading fees for funds vary from zero to the same fee as trading shares.
Platform fee
This is an annual fee charged for holding the shares and funds on your platform. Some platforms charge no fee for this, others charge a flat fee and some charge a percentage, typically 0.25% to 0.45% of the value of your portfolio.
It’s also worth looking at the types of investments that incur a platform fee as some platforms charge for holding funds, but not for shares. When a platform fee is charged for holding shares, this is sometimes capped at a maximum amount per year.
There are two types of percentage-based platform fees:
- Tiered fee: this is the most usual type of platform fee, whereby you pay different fees on different ‘slices’ of your portfolio. For example, if you have a portfolio worth £300,000, you might pay 0.45% on the first £250,000, then 0.25% on the next £50,000.
- Non-tiered fee: only one of the platforms – Fidelity – charges a non-tiered fee, whereby you pay the same fee across your whole portfolio. For example, if you have a portfolio of £300,000, you would pay 0.2% on the whole £300,000.
These fees will usually be taken out of any cash held on your account or you can pay fees directly by debit card. However, the platform is likely to sell a proportion of your shares as a last resort if fees remain unpaid.
Foreign exchange fee
Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin.
Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.
If you buy or sell shares denominated in a currency other than pounds sterling, nearly all of the platforms charge a foreign exchange fee. This is also referred to as a foreign currency conversion fee and typically varies from 0.5% to 1.5%. Some platforms also charge a higher trading fee for overseas shares.
A small number of platforms allow you to hold foreign currency in your account, which enables you to convert it once and use this money for buying shares and holding the proceeds from selling shares in the local currency.
Other fees
Some of the platforms charge other types of fees, such as inactivity fees and withdrawal fees (for accounts held in an overseas currency) and fees for trading by telephone.
Although not technically a fee, platforms also make money on the buy-sell spread on shares. For example, you might be looking to buy a share with a buy-sell spread of 98-100 pence. This means that you would pay 100 pence to buy a share, and receive 98 pence to sell a share.
Some platforms may offer more competitive buy-sell spreads than others, and less traded shares, such as FTSE Small Cap companies, typically have wider spreads than FTSE 100 companies.
What tax will I pay on buying and selling shares?
You will be required to pay Stamp Duty Reserve Tax (SDRT) when you buy UK shares, calculated at 0.5% of the value of the transaction. This is not usually charged on buying overseas shares, although other taxes may be charged.
You may also have to pay capital gains tax if you sell the shares for a higher price than the price you paid. This is charged on the ‘profit’ (the gain you make) although the capital gains allowance is £6,000 for the current (2023-24) tax year – this means that you do not have to pay capital gains tax unless you make a total profit of more than £6,000.
In addition, you may have to pay income tax on any dividends received from your investments. However, as well as your personal allowance (£12,570 in the current tax year), you have an additional dividend allowance of £1,000 (in the current tax year).
As mentioned earlier, you do not have to pay income or capital gains tax on shares held in ISAs, SIPPs or JISAs.
What do I need to know about buying US shares?
Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin.
Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.
As with overseas shares, you will have to pay any share trading fee and applicable foreign currency exchange fee if you are looking to trade in US shares.
You will also be asked to complete a W-8BEN form (valid for three years) which allows you to benefit from a reduction in withholding tax for qualifying US dividends and interest from 30% to 15%. Holding US shares also carries exposure to foreign exchange risk. If the pound strengthens against the dollar, your shares will be worth less in sterling (and vice versa).
As with UK shares, any profit on US shares will be subject to capital gains tax, unless you hold the shares in an ISA or SIPP.
What regulatory protection should I look for?
When choosing a trading platform, you should check the FCA register to ensure that your platform is authorised. This means that you have access to the Financial Ombudsman Service and the Financial Services Compensation Scheme (FSCS) if an issue arises.
The Financial Ombudsman Service will consider complaints against trading providers and may be able to resolve your complaint if the firm fails to deal with it properly.
The FSCS will consider claims if your trading provider goes out of business and owes you money, however it relates only to certain investment products. If the product is covered, the FSCS can pay up to £85,000 per investor.
It’s worth checking the protection offered by your trading platform – some platforms are structured so that investments are held in ‘trust’ to protect them in the event of the firm running into financial difficulties.
What should I consider before share trading?
Investing in shares can be a good way to produce higher returns than cash-based investments. However, your investment can go down as well as up, and you may not get your money back.
Investing in a diversified portfolio of shares via a fund, investment trust or exchange-traded fund, may help to reduce your exposure to an individual company underperforming. However, if you are unsure as to the right path, you may want to seek professional advice.
