The stockbroking revolution

In recent years, there has been a radical transformation in the way in which stocks and shares are traded. At one time, if a member of the public or an organisation wanted to buy or sell stocks and shares, he or she had to pay for the services of specialist stockbrokers and stockjobbers who had the exclusive right to trade and work on the Stock Exchange floor. This form of share trading worked reasonably well in the days before modern communications. However, the development of Information Technology applications, such as on-screen buying and selling, has made the old trading methods redundant.

This case study focuses on key aspects of the ‘stockbroking revolution’ and shows how Barclays Stockbrokers has embraced modern technology in order to give customers maximum control of their own stocks and shares trading. In particular, the study explains how Barclays Stockbrokers launched Europe’s first real time fully electronic stockbroking site. The key aspect of this innovation is that it brought ‘second generation trading’ (without human intervention) to the market. The Barclays brand name brings to the new product a strong sense of reassurance about the security of online dealing.

The London Stock Exchange

The London Stock Exchange plays a vital role in maintaining London’s position as one of the world’s leading financial centres. It is one of the top three exchanges in the world. The origins of the Exchange go back to the coffee houses of 17th century London, where entrepreneurs who wished to invest or raise money bought and sold shares in joint-stock companies to fund journeys to the unexplored Far East.

The Stock Exchange now provides an essential market-place, where companies can raise finance for expansion, and investors can share in their growth. Offering companies the opportunity to grow by raising capital is one of the principal roles of the Exchange. Companies wishing to raise money can issue new shares which are sold to investors through the Exchange. This is commonly done when the company joins the market – a process known as a flotation. Companies wishing to float on the London Stock Exchange have a choice of two markets, the Official List or Alternative Investment Market (AIM).

The Official List, or main market, is for established companies. There are now over 2,700 companies whose shares are traded on the Official List. Over 500 of these are non-UK based. Companies seeking to join the Official List must meet the necessary requirements set down by the Exchange and must continue to meet certain standards once they are listed in order to give investors confidence.

The Alternative Investment Market is a market for smaller companies. It was established in 1995 to allow younger and growing businesses to raise capital to fund their growth. There are fewer rules for AIM companies than for companies on the Official list but they are required to retain the assistance of an organisation providing market expertise, known as the nominated adviser, at all times. There are now almost 300 companies in the AIM, ranging from very hi-tech organisations to leisure and restaurant operators.

Investors can participate in the stock market either when a company issues new securities or subsequently, when the shares are traded on an ongoing basis. There are all sorts of securities available to buy and sell on the Exchange, including UK and foreign equities (i.e. shares in companies) and UK Gilts (issued by the UK Government). The key benefits to a company of seeking a flotation on the Exchange are:

• access to funds from the widest range of UK and international, institutional and private investors
• the ability to raise money to fund future projects
• a higher profile for the company’s business nationally and internationally – a sort of ‘stamp of approval’.

The role of stockbrokers

A stockbroking firm is the link between the investor and the stock market. The firm’s role is to obtain the best price available for the investor’s shares whether they are buying or selling. A stockbroker can also deal with all the paperwork involved in transactions in stocks, such as Giltedged securities and shares, which leaves the investor free to concentrate on his or her investment strategy.

Finding a stockbroker

Many people find their stockbroker by word of mouth alone – through recommendations from friends, colleagues or acquaintances. There are, however, a number of other ways in which to find a good stockbroker. For example, there is a list of local stockbrokers in Yellow Pages. There is also a national directory of private client stockbrokers issued by the Association of Private Client Investment Managers and Stockbrokers (APCIMS). It starts with an explanation of the main features of the membership, then lists the type of service offered by each stockbroker, followed by the range of available products.

Types of service

An investor must decide on the type of service he or she requires and how much he or she is prepared to spend on commission charges and advice. The most basic and cheapest stockbroking service is known as execution only. This means that an investor merely instructs the broker to buy or sell on his or her behalf, either a fixed number of shares or shares up to a certain value. Orders are normally taken over the telephone or by post and within a few days, the investor should receive a contract note confirming the deal. This service is particularly suitable for investors who have the time to make their own investment decisions and are comfortable about doing so.

If an investor prefers to consider advice from a stockbroker, the service known as dealing with advice may be more appropriate. In this instance, the broker uses his or her expertise and knowledge of the market to recommend which stocks and shares to buy and sell. However, the broker will emphasise that the final decision must lie with the investor. The most comprehensive facility is known as discretionary portfolio management. This allows the investor to delegate all investment decision making, transactions and paperwork entirely to the stockbroker, who will endeavour to construct a portfolio best suited to the investor’s requirements.

Barclays Stockbrokers

Barclays Stockbrokers is the UK’s largest retail execution-only broker, providing both certificated and nominee services. It also provides advisory and investment management services. Personal Equity Plans (PEPs) are also offered, enabling clients to shelter £9,000 of their portfolio, every year, from the effects of income and capital gains tax. Barclays Stockbrokers administers corporate share dealing services and a range of corporate PEPs on behalf of the shareholders and employees of many well-known ‘blue chip’ UK companies.