A Cheaper Way To Buy Shares

Published in Investing on 8 May 2012

Our Investing for Beginners series looks at a very cheap way to buy shares.

In the previous instalment of our beginners investment series, we examined the costs of buying and selling shares, and saw how that affected the minimum cost-effective amount to trade in any one transaction. Today, we'll take a look at another type of online account -- one that means it's cheap to buy shares, lowering the effective minimum you need.

Some brokers these days offer an account that has more limited facilities than a regular account, but in return is able to offer trades for a very low cost. The Fool's version of this is known as The Motley Fool ShareBuilder, and charges only £2 per purchase.

Regular investments

An account like this is able to charge so little because it does not offer real-time, on-demand purchases. Instead, it works by setting up a regular savings plan, in which you can save a minimum amount per month -- in the ShareBuilder example, that can be as little as £20.

Your chosen shares are then bought on a specific day each month, rather than your being able to choose the time of your purchase, get a real-time quote and then have your 15 seconds of make-your-mind-up time.

There are typically a small number of trading days per month -- ShareBuilder operates on four -- and members' cash is pooled in the periods in between in order to make one big trade per share, and thus get the costs down really low.

Timing vs charges

The obvious downside is that, by not being able to time your entry and exit, you might not get the best price. But timing the market is notoriously difficult anyway, and many long-term investors don't bother attempting it, believing that regular investments spread over a long horizon at the minimum possible cost is going to beat the market-timers.

Another advantage of pooled purchases like this is that it allows you to buy fractions of shares. Suppose, for example, you want to buy AstraZeneca (LSE: AZN) shares, and you have £100 to invest. At the current price of £27.20 per share and with a broker charge of £2 and 0.5% stamp duty, you could buy three of them for £82.03, leaving £17.97 doing nothing until the next month.

Lower minimum amount

But by pooling purchases, ShareBuilder can buy a larger chunk and allocate the equivalent of 3.58 shares to your account, so that all of your money is working as soon as possible.

And that brings us to one very real advantage. Remember that £500 minimum realistic investment amount for a regular ShareDealing account? By charging just £2 per purchase rather than £10, a ShareBuilder type account lowers the realistic minimum purchase to just £100.

And that really does bring the ability to invest in the stock market to pretty much anyone who can afford to save a modest amount regularly.

Enjoy the very latest on investing and the markets, direct from David Kuo. He's helping Britain invest. Better. Join David and The Motley Fool Collective today and you'll receive a special free report -- "10 Steps To Making A Million" -- straight to your inbox.

More in this series:

> Alan does not own any shares mentioned in this article.

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