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How to open an online broker account and start investing

by The Details Man on August 5, 2018

Image of two medieval traders, the pre-cursors to modern markets and brokers

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.

We’re going to run through opening a S&S ISA. There is little difference between setting up either of the three account types though, in practice.

2. Fill out your personal details

Screenshot showing personal details required by one broker to set up new account

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.

Screenshot of a typical broker direct debit capture form

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.

Screenshot of initial investment option with new broker account

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.

Screenshow showing options for where to send cash distributions you're paid from your investments

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.

Read all The Detail Man’s posts on Monevator.

Variously known as Unit Trusts or Mutual Funds or Open-Ended Investment Companies, which are all basically the same thing for our purposes here. [↩]

{ 29 comments }

Weekend reading: How high should interest rates really be?

by The Investor on August 4, 2018

What caught my eye this week.

The Bank of England is hellbent on crashing the economy, having recklessly raised interest rates by 0.25% to 0.75% this week.

No, that’s not my opinion. But it was a view sounded by many commentators in the wake of Bank Rate rising above 0.5% for the first time in a decade. Critics even included one former Bank Rate setter.

Really? Let’s remember that with inflation running at well over 2%, we still have a strongly negative real interest rate. (‘Real’ means inflation-adjusted, remember).

Even after this latest rise, the real Bank Rate is still MINUS 1.55%.

And that’s before we take into account the impact of all those rounds of quantitative easing, the point of which was to effectively lower real interest rates in the market.

Money remains historically very cheap.

Borrowers still blessed

It’s true that several million people on variable rate, tracker, and discount mortgages will see their monthly payments inch up a tad.

But many such homeowners have seen their mortgages being paid off by a decade of negative interest rates. For all the austerity felt by the poor, it’s been a super time to be a middle-class homeowner. Few should complain too loudly about a 0.25% rate rise.

On the flip side, some of the rate rise will be passed on to savers, though as we slowly return to something like normal rates we should expect this to lag.

UK banks never took the interest rates paid to ordinary savers below 0% in the financial crisis. Instead there was a compression of the spread of rates that banks usually profit from. This will have to be unwound, and so I expect savings rates to rise more slowly than mortgage rates.

I’m inclined to think that if the economy cannot take a slightly less negative real interest rate – fully ten years after the financial crisis and with employment and with house prices at an all-time high – then we ought to find out sooner rather than later, as opposed to speculating.

Star power

With the rate rise expected by everyone, perhaps the more interesting thing to come out of the Bank was an estimate what its wonks call r*. (Pronounced “r-star”).

r* is shorthand for the ‘equilibrium real interest rate’ – and if you think that mouthful is reason enough for the shorthand, wait until you hear the long definition:

The ‘equilibrium interest rate’ is the interest rate that, if the economy starts from a position with no output gap and inflation at the target, would sustain output at potential and inflation at the target.

Okay, perhaps that’s not too confusing. But then I have been reading the Bank’s deliberations for the past couple of hours, so perhaps I’m inured to banker-speak.

You can get up-to-speed on r* for yourself by reading pages 39-43 of the newly-published Inflation Report [PDF].

Basically r* is the Goldilocks interest rate – neither too hot (that is, a rate that’s too low) to stoke the economy and push up inflation, nor too cold (er, a rate that’s too temptingly high) to incentivize savers to move their money out to work fueling the engines of capitalism, as opposed to leaving it all sitting in a bank in cash.

Unfortunately, there’s no way of knowing exactly what r* is at any particular time.

Instead, policymakers have to infer it, in the same way that you have to try to figure out if he or she is really in love with you.

Various factors may weigh down – or boost – the equilibrium real interest rate. In the medium to long-term though there’s presumed to be an underlying trend rate – confusingly also called R*, though note the capital – which is where real interest rates could sit if the economy never fluctuated and Bank officials could spend their time at the beach instead.

Sadly in the real world, things do impact the rate – an impact that the Bank labels s* (where the ‘s’ supposedly stands for short-term but which I think stands for ~~shit~~ stuff happens.)

When s* would heat things up, r* would need to be higher than it otherwise would be (R*).

When s* is a drag, r* would need to be lower.

Right now the Bank believes we’re still in a sticky patch for ‘stuff happening’, what with the Brexit uncertainty, talk of trade wars, the lingering impact of the financial crisis, and also perhaps rates around the developed world being similarly measly.

This belief that r* is low is why Carney and Co. have been keeping Bank Rate so low, and why the Bank is raising rates so slowly.

The Bank’s assessment is that R* would be too high a Bank Rate to keep inflation on target at 2%, given the headwinds.

It believes r* is lower, and hence we still get low interest rates.

R-stars in their eyes

If you’re not asleep by now, no doubt you’re screaming: “Great, but what should R* be! Surely that’s the important bit!”

You’re right, like the Bank of England I’ve deliberately buried the lead.

After stressing that its best guess is just that, the Bank estimates that R* – the long-term trend real equilibrium rate, you’ll recall – is currently somewhere between 0%-1%.

What’s more, it estimates R* has plunged from around 2.25%-3.25% back in 1990!

This is all hugely significant.

Remember, R* is a real interest rate. Add the 2% inflation target onto it, and we get to where the Bank Rate would be in a perfect world (to over-simplify).

What the Bank is estimating is that absent those short-term / stuff happens factors, Bank Rate would now be at between 2-3% (as opposed to 0.75%).

In contrast, if R* was still where it was in 1990, the equivalent ‘normal’ Bank Rate would be 4.25-5.25%.

Clearly this has big implications for both savers and borrowers.

It suggests anyone waiting to get 5% – or even 3% – in a standard savings account shouldn’t hold their breath.

Similarly, mortgage holders shouldn’t have too many sleepless nights worrying about rates leaping back up to 5-7%, at least on current forecasts.

Playing for ratings

Of course if R* can come down then it can go up again.

The Bank thinks that the aging population, slower productivity growth, and the impact of more cautious financial regulation has likely pulled down R*.

Set against that, it believes the requirements of younger foreign savers and even the rise of the robots could affect R* in the future.

But it doesn’t expect anything to happen very quickly, to either r* or R*.

Absent some huge shock such as a Hard Brexit or a surprise election-related run on the pound, the bottom line is interest rates aren’t going much higher anytime soon.

[continue reading…]

{ 12 comments }

Weekend reading: Death to the Lifetime ISA?

by The Investor on July 27, 2018

What caught my eye this week.

I would love to start here with an analogy drawn from the film Synecdoche, New York. But I fear I’m quite possibly the only person on Earth to have ever seen it.

Allegedly others have. Reviews exist on the Internet. Some rightly hail Synecdoche a work of genius. A few fools label it pretentious twaddle. But I’ve never met these critics – I even saw the film in what seemed to be an empty cinema – so I can’t rule out those reviews coming from some weirdly highbrow Russian bot farm.

Anyway, Synecdoche, New York contains multitudes, but the bit I would like to be alluding to – which I’m going to explain in words instead, which is obviously ideal in an analogy – involves the lead character’s attempt to film a story drawn from his own life by rebuilding his life – and his house, and the surrounding city – inside an enormous film set.

Which is how I found myself proceeding when I tried to write about the Lifetime ISA.

You think I’m joking?

I’m not!

Lifetime sentence

I published a piece explaining how the Lifetime ISA worked in April 2017. This long post was what remained after I hacked out a big rant about the silliness of the product – and another multi-thousand word discussion about who should make use of one.

Instead, I just gave some vague pointers, then concluded:

In the next post we’ll see exactly who the Lifetime ISA might be good for, and who should say “no thanks”, and back away slowly.

And to this day I have never finished that follow-up.

My draft is huge, contains multitudes, and is unfinished. The knowledge of it sitting there has often given me writer’s block and stalled other articles. The thought of comment after comment pointing out this or that issue if I did publish it without chasing down every last use case makes me freeze up. Instead I kick it down the road for another week or six.

Even unfinished the article wanders widely into all kinds of areas of investing – risk, time horizons, shares versus property, taxes, early retirement versus traditional pension saving, employer pension contributions – because the Lifetime ISA forces all this onto the table.

That might sound like a good read, but it is very sub-optimal. We already have a couple of million words across more than a thousand Monevator articles trying to cover all that, and there are still holes. This Lifetime ISA draft article manages to be both insanely verbose and yet still not sufficiently comprehensive to ensure nobody is misled.

Now you might be thinking:

“Okay TI, I get that the Lifetime ISA is a bit convoluted with the pension and house buying bung combo rolled into one wrapper, but I managed to figure out that I should / should not use one.”

I believe you! It’s just about possible to figure out whether an individual should open a Lifetime ISA, if you’re there with the individual.1 After two or three hour-long conversations for example I got there with my ex.2

But you really do need everything on the table to make this decision, in a way that’s not true of any other financial product I can think of. Which means that while it might have been straightforward-ish for you to decide what you should do, generalizing advice for even broad groups is very difficult.

Seriously, the Lifetime ISA is like some kind of beneficial yet malevolent magical goblet in a Greek legend. One minute it’s refilling itself with ambrosia. The next minute it’s chomped your arm off.

I believe this complexity is why even today only around half a dozen financial service providers are offering Lifetime ISAs (and only a couple the cash version). The others may fear a mis-selling scandal. Or, like me, they were hoping it would be killed off sooner rather than later.

Which brings me finally to this exciting news from Treasury Select Committee3 as reported by ThisIsMoney:

The Treasury Committee has today called for [Lifetime ISAs] to be scrapped due to their ‘perverse incentives and complexity.’

My heart just skipped a beat.

To throw out a spoiler for a film you’ll never watch, Synecdoche, New York ends on a gloomy note. The director’s project proves fatal. Don’t fire this one up for Netflix and chilling.

But could my own half-finished epic have a happier ending?

MPs might throw me a lifeline – if they can stop bickering for five minutes about when to start stockpiling prosecco – and give the Lifetime ISA the unceremonious death it deserves.

[continue reading…]

More precisely, whether they should USE one. I’ve said anyone under the 40-year old age limit should open one with £50, simply to ensure they have the future optionality. [↩]
Yes, I’m a thrill a minute of a boyfriend. Perhaps that’s why I am now an ex… [↩]
Yes, I said ‘exciting’. Again, form a queue ladies. [↩]

{ 58 comments }

Weekend reading: One more year, justified

by The Investor on July 20, 2018

What caught my eye this week.

The rebooted US financial blog Get Rich Slowly posted some interesting data this week about the benefits of working the dreaded One More Year – or even a few more – before retiring.

It’s interesting to see the results recast as ‘standard of living’ rather than just dollars banked:

Note that the last time I highlighted similar US data, a wise comment pointed out the US retirement benefits system is different to ours. That may limit the read-across for UK readers.

Also, I feel Get Rich Slowly skips over a big reason why standard of living increases – which is that the years left living in retirement decrease, so the money doesn’t have to stretch so far! We’re not playing with an infinite resource here.

Still, I do feel that the benefits of working just a little longer to get a little more spending money forever are often too quickly dismissed – especially by the heads down and head for the exits FIRE crowd.

Retirement Investing: In 12 month’s time

Consider the case of Retirement Investing Today. He revealed this week that working an extra year or so has given him a £300,000 buffer above his £1 million retirement target. That could be an extra £12,000 a year to spend on fun things – for life.

Of course that stupendous excess achieved in a short period of time is a massive extra lump of cash in anyone’s books. If you’re working on your local council golf course at £9 an hour it may seem pie in the sky.

But remember firstly that RIT put himself in this position through ten years of hard graft. He concentrated on working hard, as well as saving and investing – on climbing the corporate ladder, but saving rather than spending away the proceeds.

Indeed one reason why I applauded his decision to work an extra year was because it seemed to me worth harvesting the prime position he had put himself in. RIT will probably never be in such a position to sock away cash again.

And once you know you are financial free, the desire to actually deploy the F.U. fund diminishes. I’d bet his last year at work has been the least desperate.

The second thing? It’s all relative. If you’re looking to retire early and you’re on a lower wage, then you must have cut your cloth accordingly. (If you’re an ex-Cityboy sitting on a mega-nut and earning £9 an hour, feel free to call it quits yesterday).

The world is full of wonderful places, things, and experiences, but not all of them are free. I’m as big a fan of quietly reading a novel alone in a park on a Tuesday afternoon as you’ll find – I wrote the guide to living like a billionaire for next to nothing – but there are limits.

It’s also why I think those who do quit work should consider trying to find something they don’t mind doing for a day a week for money. Each to their own, but I feel some are too dogmatic about this.

A little more spending money goes a long way. We don’t have to be fanatics about this stuff.

[continue reading…]

{ 34 comments }

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