Trading Places

Online trading is now the norm, but it wasn’t always the way. It’s only a few years since shares were traded on the ‘open outcry’ system, where traders shout orders to each other across the trading floor. In fact, some markets still do this – the Chicago Mercantile Exchange trades commodities in this way, made famous by the Eddie Murphy/Dan Akroyd movie Trading Places.

However in 1979, the world changed. Compuserve marketed a new product to consumers called MicroNET, sold through Radio Shack outlets. This was the advent of the internet to the consumer market, and it grew rapidly.

Businesses quickly seized upon the idea of making money from the internet. Two such individuals, Bernie Newcomb and Phil Porter, developed the first prorgram to trade shares in 1980. After further developing the system, a Michigan dentist made the first stock trade for the company Trade*Plus on 11 July 1983. A mere nine years later, the company was named the fastest growing company in Silicon Valley. By 1996, Trade*Plus was renamed E-Trade Group.

The 1990s – explosive growth, falling prices

The 1990s saw explosive growth in online trading, with hundreds of companies hoping to strike oil in the rapidly growing online trading market. The internet was a great medium for buying and selling shares: more efficient than stockbrokers, cheaper, quicker and allowing access to more information to aid decision making.

As online trading grew in popularity through the bull market of the 1990s, everyone thought they could make money – and most did as the market kept going up. Discount brokerage houses grew out of this fervour. Charles Schwab was one of the innovators of discount brokerage services, and was the first to offer a 24-hour quotation service in 1980. By 1996, Schwab offered live trading.

The cost of a trade was dramatically lowered as technology grew and improved. At first, a US$24 trade was thought to be excellent value. However, as companies grew more web-based and more competitors entered the market, prices fell quickly. When the internet bubble burst and the dotcom market collapsed in 2000, internet brokers slashed their trading prices even further to maintain their clients.

Access and simplicity are the current fad

Now the market for online broking has somewhat settled. It has matured and developed in different ways. Increasingly, companies are offering customers the opportunity to access all their financial information from one source. The advent of platforms has evolved as the focus has shifted away from the price to making it easier for investors to manage their finances through the single click of a button from their iPhone, BlackBerry or other mobile device.

Online trading options

There’s not much you can’t do online these days. The same is true when it comes to managing your money. There is a multitude of platforms out there, whether you want to buy shares, bonds, options, or currencies.

What can you trade online?

Online trading platforms are maturing quickly and we are moving towards a one-stop-shop environment. There are, however, still subsectors of platforms that offer investors the choice of certain investment vehicles.

Securities: stocks and shares, mutual funds and bonds. Many of the traditional broking houses evolved into platforms offering online trading of these investment types. Examples include Fidelity, Cofunds, Selftrade and, of course, the deVere Fund Platform.

Forex: there is a huge number of sites that allow clients to trade in currency exchange rates online. These are extremely liquid markets and are open virtually 24/7. Many offer tutorials, articles, trading ideas, and ‘try-before-you-buy’ virtual trading areas. Investors can trade currencies in the traditional method – using cash – or with leverage through the medium of spread betting.

Spread betting

Spread betting is an alternative way of investing and allows you to ‘bet’ on the price of a share, currency or commodity without actually owning the share. You can bet on the price going up or down, and the trade often involves the use of leverage, making it a high-risk/high-potential-reward investment approach. Because of the leverage involved, the major risk of spread betting is that investors can lose more money than they put in.

One of the main benefits of spread betting is there is no tax involved. It is not deemed to be an investment, so you are not taxed on any capital gains or income. There is also no stamp duty to be paid, which is normally 0.5% on the purchase of UK shares.

Also, spread bets do not pay dividends. Instead, the dividend payment is built into the bid-offer spread so if you hold a position in a dividend-paying share, you can reap the rewards in the form of a tax-free capital gain rather than taxable income.

In general spread betting is very flexible, including small investment sizes, no currency risk, less paperwork than dealing in shares and the ability to trade in multiple markets from one account.

CFDs (Contracts for Difference) are similar to spread bets, except CFDs do not have an expiry date (spread bets do), CFDs pay dividends (spread bets don’t) and CFDs are subject to capital gains tax (spread bets are tax free).

Why use a platform?

There are significant benefits to investing online. Firstly, a platform gives investors easy access to view their portfolios on a real-time basis, and at a time that suits them.

They can trade when they want to, not at the whims of a stockbroker, who may be out to lunch when the client wishes to place an order.

The costs of online trading are typically far lower than an offline approach. This allows platforms to pass some of these cost savings to clients in the form of lower annual charges on funds, lower dealing fees on shares, or narrower spreads on spread bets.

Most platforms give investors tools to help them narrow down their choice of funds, understand their own risk profile and analyse their portfolios on an ongoing basis. They will also act as a library of valuable information about the funds, about investing in general and allow fund managers and platform operators to disseminate interesting articles to clients, explaining their investment thinking.

Future trends

Being able to trade multiple asset classes on the same platform will be the future. Different ways to trade traditional asset classes, going electronic, and new types of listed derivatives and structured products will soon become the norm.

The ability to trade quickly is still a race, as companies compete to develop technology that will allow trading within nanoseconds rather than microseconds.

In addition, as smartphones become ubiquitous, fund platform providers will be working on ‘apps’ to allow secure and efficient trading and portfolio monitoring.

The future of trading will continue to be about developing the software and content that is required to keep pace with the constantly evolving hardware such as iPhones, BlackBerrys and Android phones. The next generation of investors is going to watch movies like Trading Places (which was made in 1983) and think of it as an antiquated, alien concept.

How to choose the right platform for you?

The choice of platform is one of the last decision you have to make as an investor.

It should come after the following:

• What are my aims?
• How long am I investing for?
• What is my attitude to risk?
• What kind of investments are suitable for me?

After this self-analysis, or with the help of your adviser, you may, for example, come to the conclusion that you are going to invest in a combination of equity and bond funds, with a small portfolio of direct holdings in shares. That will automatically narrow your choice down to a range of platforms that offer these services.

When it comes to choosing between platforms, there are several factors for you to think about:

• Cost: what charges will you face?
• Discounts: is the platform able to offer you discount on fund managers usual rates?
• Service: can you deal with them as you wish (online, by phone, by post
• Added tools: does it have calculators, risk-profiling software or other tools that help you?

deVere’s Fund Platform

The deVere Fund Platform www.deverefundplatform.com allows investors to manage their portfolios online in a secure environment. It gives access to a range of over 5,000 funds from over 200 fund houses, which have been carefully selected. The platform is underpinned by technology from platform-software experts Boston Funds Direct, while the service and systems of Moventum, together with custody provided by Bank of Luxembourg, ensure a secure trading environment. Meanwhile, valuable information and ratings on the funds are provided by leading data-provider Morningstar.

deVere’s platform allows clients to search all the available funds, while special deals are also available from the firm’s partner companies, such as Morgan Stanley, Jupiter and Deutsche Bank. It also gives the opportunity to plan ahead, with financial tools such as a currency converter and risk-profiling tool.

Benefits of deVere’s platform at a glance

• 5,000 mutual funds from over 200 leading fund houses
• Access to portfolio details 24/7
• Valuable source of financial information:
  
  
  • - Research information
  • - Fund alerts
  • - Investment news
  • - Independent fund research
• Automated portfolio monitoring
• Highly secure online trading platform
• Customer data is secure and confidential

For more information or advice, please contact one of our experienced financial consultants now on investorinsight@devere-group.com