UK: Online traders brighten gloomy market
There are signs of life, and they are coming from private investors using the internet
by Katherine Griffiths and Stephen Pritchard
02 March 2002
The number of usually sophisticated private investors who trade over the internet are venturing back to the market as they begin to have faith that it is past its most gloomy phase. But figures released this week show most of Britain's investors are still reluctant to catch on to the trend.
Online trading zipped up by 68 per cent in the three months to December compared to the previous month, shows research by Britain's largest online share dealing company TD Waterhouse.
This confirmed industry-wide findings by Apcims, the stockbroker trade body, which showed that investors buying shares online ended 2001 with a "surge in activity". Online traders fall into the execution only category, which means they buy their shares directly rather than through a broker.
Apcims found this group bought more shares than they sold in the fourth quarter of 2001 for the first time in more than a year. Before this, most investors sold more shares than they bought after many piled into the market in 1999 and got their fingers burnt by the implosion of the dot.com bubble in spring 2000, which sent share prices into a tailspin.
Nigel Reynolds, a director at the broker Charles Schwab, says: "Investors trading over the internet are seeing opportunities to come back into the market. It is not a surge, but it is definitely starting to tick up. People who use the internet look carefully at prices and are thinking that stock such as Vodafone looks cheap."
Paul Stallard, marketing director of TD Waterhouse, believes the upturn among online traders is mainly because this group is made up of younger investors who use the internet for extensive research about companies and share price movements and are more confident than other private investors.
"We are not back to the hazy days of 1999, but we have seen a fourfold increase in online trading in the last 12 months," Mr Stallard says.
The trend contrasts to what brokers are finding among the wider public who want to save and invest. The most popular way of doing this these days is through individual savings accounts (Isas). Yet gross Isa sales were just £380m in January, compared to £637m a year ago. Anecdotally, brokers are reporting that the past few weeks have also been below last year's levels, themselves significantly down on the year before. The Apcims findings support the view.
Unlike online traders who have become net buyers of shares, those going through the more traditional route of using an adviser remain net sellers. Most Isa sales fall into the advisory category because the majority of buyers are less experienced investors and do not want to enter the stock market without guidance.
But brokers do expect Isa sales to rise, especially over the next few weeks as investors take advantage of the tax-free vehicle before the end of the tax year. Mr Stallard says: "It is my view that the level will not pick up to last year's level but the gap will be narrowed."
The move could benefit many investors because most share-owners still do not take advantage of Isa rules to avoid paying tax on the gains tax on shares.
More than nine million people in the UK hold shares in the form of traditional, paper certificates, rather than through vehicles such as Isas. "Of the nine million or so people with physical paper shares, none will be in tax- efficient vehicles," says Mr Reynolds. "These people are happily paying tax on their dividends. If you are a higher-rate tax payer, holding these shares in an Isa will make a real difference."
Investors who have not already taken out a stocks and shares Isa in this tax year – in mini or maxi forms – can use their allowances to shelter shares they own. With popular shares such as BT trading on low valuations, this is a good time to make the switch.
"Sale and subscribe, as it is known, has a lot of potential in this market," says Peter Boucher, marketing director at brokers SelfTrade. "Some stocks are trading at quite low levels, which does reduce the cash equivalent you are putting in to the Isa." The Isa limits this year are £7,000 for a maxi and £3,000 for a mini.
Sheltering shares from capital gains tax (CGT) is an attractive reason for putting them in an Isa, but the CGT rules are complicated and care is needed to avoid an unexpected tax bill. Inland Revenue rules to stop tax avoidance through a practice known as "bed-and-breakfasting", selling shares and buying them straight back, do not apply to shares sold and bought back in an Isa. This brings a double benefit of using Isa and CGT allowances in one go.
Moving shares into an ISA is also a good opportunity to realise a loss, for example on dot.com shares, for tax purposes. This can be useful for investors who want to offset gains on other assets, such as property.
The main disadvantage of the switch is the cost, but several brokers offer reduced charges. This is a useful incentive, because putting shares into an Isa can be expensive. Investors must first sell the stock, and buy back the same shares on the market, but this time within a self-select Isa. They will have to pay stamp duty, as well as absorbing the normal bid-to-offer spread.
Investors should move quickly if they want to move shares into an Isa. NatWest suggests a deadline of 8 March; Schwab suggests 23 March. But if you miss those times, you can open a self-select Isa with cash up to 4 April. You then have 12 months to invest the money.
'I want to save for a world sailing cruise'
Dillon Dhanecha, a marketing manager based in Reading, become a private investor last year.
He bought shares in Abbey National, Rentokil Initial and Marks & Spencer. In December he opened a self-select Isa with SelfTrade. He decided to switch the shares into an Isa because he had not used the year's tax-free allowance.>
He plans to hold the shares, with a view to watching them grow, and hopefully to fund a round-the-world sailing trip. "I'd rather put money towards my sailing trip than give it to Gordon Brown," he says. "I didn't want to sell my shares and I didn't want to pay unnecessary tax. My M&S shares are doing well and I want to avoid capital gains tax further down the line." |
