part0019

An important decision to be made by most private investors is whether or not they should use an execution-only broker or a broker with a more traditional and helpful service. There is no doubt that using an execution-only broker saves commission but many investors like to obtain a second opinion and to have their hand held to a certain extent.

If you intend to use an execution-only broker, Fidelity and Sharelink are two of the largest and best-known, although by no means the cheapest. Fidelity Brokerage is the UK stockbroking arm of Boston-based Fidelity Investments. Fidelity does not leave you completely on your own, as it provides a broad range of market and company information free of charge. However, they will definitely expect you to make your own decisions, and thereby save commission. In broad terms, Fidelity’s charges are about 50% of those of a traditional broker for small clients.

Sharelink’s charges are about the same as Fidelity’s. However, they also have a Sharefinder service, which covers the leading 650 companies. It has three essential features – a weekly performance summary, a weekly buy/sell guide and individual company reports. There are modest charges for these extra services but they seem to be good value.

Other execution-only services which appear to offer attractive commission rates include City Deal Services, a member of the Cater Allen group, which will buy or sell £1,000 worth of shares for as little as £9, and YorkShare, the Yorkshire Building Society’s share dealing service whose charges are broadly similar. Both also offer PEPs and other services such as bed-and-breakfast deals at the end of the tax year.

All these execution-only brokers advertise regularly in magazines such as Investors Chronicle , and are happy to send brochures if you contact them.

Traditional brokers’ commissions on the purchase and sale of stocks range from about 1.65% to less than 0.3% according to the size of the transaction and the importance of the client. You should not begrudge a good broker his commission provided you get the right level of service. You should be looking for a broker who is really switched on and anxious to please.

Many small investors feel that they cannot be too demanding because their account is relatively small and therefore unimportant to their broker. This is where REFS comes to the rescue by sieving out companies that would otherwise waste subscribers’ time and the time of their broker. It helps to conserve energy by quickly eliminating those companies that are not worth pursuing, thereby enabling you to concentrate your research on those that stand a really good chance of becoming a part of your portfolio. If a company’s cash flow is well below its EPS or its previous year’s relative strength is poor, or its PEG is over one – give it a miss. There will be enough shares that fulfil all of your criteria, so do not waste your time, and your broker’s in obtaining further information about shares which are unlikely to be of much interest in the final analysis.

The minimum information you will require to check out a share will be the last two annual and interim reports and press cuttings for the previous six months. The last three annual reports would be preferable and twelve months’ press cuttings, but that might be asking for too much if you are going to be checking companies every week. To save troubling your broker unduly, it is preferable to fax the company secretary or the company in question to request annual and interim reports. They are usually very obliging and REFS always give the fax number in the company entry.

I always ask my broker to try to get hold of other brokers’ circulars on any company in which I am interested – the more of them you can read the better.

Whether you invest or not it pays to make a file on each company. You will often find that you return to them a year or so later and it would be a pity to have to start all over again. Needless to say, if you do invest, or are likely to do so, the file should be kept up to date.

Before making a final investment decision, the REFS entry should be checked in great detail, together with directors’ dealings and the company’s position in its sector. A wide range of factors and ratios need to be weighed up and in the next chapter I will show you how to draw all the strands together.