You can read more articles by The Details Man on his own blog: YoungFIGuy.
There’s a lot of talk at Monevator Towers about investing in shares to build for your financial future.
But how do you actually go about getting started?
Back in the old days, to trade investments you might pop down to the local stockbroker on your High Street or set up a telephone brokerage account.
Nowadays though, it’s all done online.
To invest in funds1 or to buy individual stocks or investment trusts, you need to open an online broker account (also known as a platform or – less commonly – as a fund supermarket.)
It can be quite intimidating to open such an account if you’ve never done it before. But once you know what to do it’s easy.
Here’s a guide on how to set up a brokerage account.
Decide what type of account you need
There are three types of broker accounts for investors:
1. Stocks and Shares Individual Savings Accounts (S&S ISAs)
2. Self-Invested Personal Pensions (SIPPs) or other types of personal pensions
3. Trading accounts
There is little practical difference in terms of the physical mechanics of operating these accounts.
There are however a few investing differences.
The first is that both S&S ISAs and SIPPs are tax-efficient wrappers. This means that they confer tax advantages over standard share trading accounts. There are annual limits as to how much you can put into them.
The second difference is that there are slightly fewer investment options in a S&S ISA compared to a SIPP and fewer again than in a trading account.
The last difference is that money invested in a SIPP is tied up until retirement age, whereas with a S&S ISA you can move money in and out with a few limitations. You’re entirely free to move your money with a trading account (but watch out for capital gains taxes!)
Which account you need then will depend on the access you’re after, what your tax situation is and what investments you intend to make.
Generally it is always best to open a S&S ISA over a standard dealing account, at least until you start running up against the ISA contribution limits. You can read more on the pros and cons of ISAs versus SIPPs at the YoungFIGuy blog.
Find the right broker / platform
In choosing your broker you want to get the broadest investment options with the best possible customer service for the cheapest price.
In practice, there are some trade-offs.
See this beginner’s guide for what to look for when choosing a broker.
Monevator has been slaving away for several years to maintain an up-to-date comparison table for UK brokers. This compares all the charges for each broker. Loyal readers chime in with their personal experiences with the various options.
If you don’t know which broker to go for, the comparison table is a good place to start your research.
Set up an account
To set up your account you’ll need:
- Your National Insurance (NI) number
- Address details
- Bank account and debit card details
- A pen and paper
You will then need to go through the following stages.
1. Select the type of account you want to open
When you go to your chosen broker’s website, they’ll offer you those three different account options we looked at: S&S ISA, Trading Account, or a SIPP.
For example, here are the options from the broker we will use to illustrate the rest of these steps.
2. Fill out your personal details
3. Decide how you want to fund your account
There are three ways to fund your account:
- Invest a lump sum – You set up the account with a one-off payment, which you can top up with more money later if you want to.
- Regular monthly savings – You create a Direct Debit to transfer a set amount each month to your account. This can often be as little as £10-£25 per month, but check with your chosen platform. It’s possible to increase the amount transferred each month after the account is set up.
- A combination of the two – Fund the account with a lump sum and top-up with regular monthly savings.
Depending on the option you chose, you’ll need to fill out either your debit card or bank account details.
4. Decide what to do with your initial money
The next step is optional at this stage. You’ll be asked if you want to immediately invest the money you’ve put into the account into a fund or shares.
The investment options available will depend on the type of account you’ve set up (ISA vs SIPP vs trading account) and what broker you have opened an account with.
If you’re not sure where to invest yet, leave it in cash for now.
If you need some help in deciding what investments to put your money into, have a look at the Slow and Steady model portfolio for inspiration.
5. Choose what happens to your distributions
Depending on what exactly you invest in, your funds or shares may pay out distributions (dividends or interest) over time. The last step is to decide what happens to these distributions.
There are typically three options:
- Keep the distribution as cash in your account
- Have distributions automatically re-invested into your investments
- Have the money paid straight into your bank account.
If you’re not sure what you want to do, choose to keep the cash in your account. You can always decide what to do later.
(There are rules around withdrawing money from and putting money into both ISAs and pensions. Make sure you know all about these restrictions before you take any money out of those accounts.)
Getting stared with your new broker account
At some point you’ll be given some log-in reference details and such like. Make sure you remember these, or you could be locked out before you begin!
You’ll then usually have to wait a few days to begin playing around with your shiny new account.
Your broker will send you some letters to you in the post. You should expect two or three letters. They’ll usually arrive within a couple of working days. (Brokers act quick when they want your money!)
The first letter will usually confirm your account number and other details and that you’ve set up an account. The second will give you a PIN or password to gain first-time access to your account. You may get a third letter if you’ve set up an ISA. This will be a copy of your ISA application form.
Once all that’s arrived you’ll be able to log into your account.
A few pointers
Once you’ve got your account set up, you should do a bit of admin to make sure things run smoothly.
Every broker account will have an account administration menu, labelled ‘my account’ or ‘account settings’ or similar. Here you’ll be able to view and update all the information and options we went through in setting up the account. It’s worth taking five minutes to make sure it’s all correct.
The next bit of admin is to find out where you can access all the documents for your account. Usually, it’s under ‘documents’ or ‘portfolio history’ or similar. Consider setting up a folder on your computer to save new documents as they come in. Good records can save a lot of hassle down the line, particularly when it comes to tax affairs.
You’ll usually receive a yearly or bi-yearly statement showing all your investments. There are various other documents to look out for over the year, too:
- If you have a SIPP you’ll receive a pension illustration – a projection of your future pension pot.
- If you have a trading account, you’ll get what’s called a Tax Certificate, which gives you the information you need for completing a Self-Assessment tax return.
- When you buy or sell an investment you’ll receive a Contract Note which sets out exactly what you’ve bought or sold, how much you paid or received, and the settlement date of the trade.
You may want to download these documents to that desktop folder you set up for safe record keeping.
When you are ready to add or withdraw money from your account, you can usually find the option to do so under ‘cash’ or ‘add/withdraw money’. This menu will also typically let you access some sort of a cash statement showing how much cash is in your account, as well as how your money has moved around as you’ve bought or sold investments, paid charges, and received distributions.
Over to you
If you have yet to set up an online brokerage account to start investing, then hopefully this guide has given you the confidence to get going.
Of course, many of Monevator readers are grizzled investing veterans. What tips or guidance would you give to somebody looking to set up their first broker account? Please share your suggestions in the comments below.
- Variously known as Unit Trusts or Mutual Funds or Open-Ended Investment Companies, which are all basically the same thing for our purposes here. [↩]