Share Dealing Concepts: An Overview
Share investments and the procedures of buying and selling can be quite complicated affairs, especially with second-by-second price fluctuations, dividend payouts and corporate takeovers being regular features of the investment industry. This is one of the main reasons that any stock market investment must be done through a stock broker, someone who has undergone extensive training in the area of finance and shares investments and who is legally allowed to act as an agent on behalf of investors. Even financial advisers and investment funds must make their investments and carry out their buying and selling through stock brokers.
Stock Brokers
When looking for a stock broker to represent you in an investment, it is important to remember that brokers can have several different financial and legal relationships with you as an investor depending on how high a fee you are willing to pay them. If you are confident that you know what you're doing with your investments and you are happy to keep an eye on your portfolio, you can engage a broker in what is known as an 'execution-only' professional relationship. Execution-only essentially means that the broker will only buy or sell on your command, they will not act on your behalf without your express permission and they will not offer any investment advice.
'Advisory Dealer' Service
While this may appeal to seasoned investors, those that are new to the stock-market may want further assistance, and this is where an 'advisory dealer' comes in. Advisory dealers are the next step up from an execution-only broker, and their additional duty to their client is to watch their client's portfolio and advise if they believe a purchase or sale is necessary. While the final decision still remains with the client, the broker is able to monitor the progress of the companies the client has investments in and hopefully stop any significant losses.
'Discretionary Dealer' Service
If such losses are of major concern to the client, however, it may be worth taking the client-broker relationship to the most involved level, that is engaging them as a discretionary dealer (sometimes known as a full service broker). This entitles the broker to buy and sell on the client's behalf without having to have such deals approved by the client. This can be a good option for investors who do not want to have to monitor their stocks closely, however many investors prefer to have the final say.
Share Transaction Types
When you are instructing your broker or financial adviser (who will then go to their broker) to carry out a purchase or sale, it is important that you understand the different types of share transactions that a broker can carry out. Stock orders, as they are known, come with different conditions and can limit the ability of the broker to buy or sell. If you place a 'market order', you are instructing your broker to either purchase or sell shares in a particular company straight away for the best price possible. A 'limit order', however, tells the broker to buy or sell only for a certain price (or better), so that the transaction will not proceed unless the price desired is obtained. A 'fill/kill order' is also common, instructing the broker to either purchase or sell the shares at a certain price (or better) straight away, or cancel the order. This means that if the transaction at the desired price cannot be carried out immediately the transaction will not continue. Finally, a 'stop-loss' or 'sell-stop' order can be given in order to minimize losses; such an instruction tells the broker to sell the stocks as soon as their price drops to a specified level.
Choose Wisely
Remember to choose your stock broker wisely, as many will charge large fees to transfer your portfolio to another broker (sometimes upwards of £20 per share - a very expensive enterprise). Also remember that by choosing a broker from the London Stock Exchange's directory or from the Association of Private Client Investment Managers and Brokers you are at least guaranteed a level of reliability and accountability that might not otherwise be available.