Adding up the costs of buying and selling shares

What you’ll learn:

• The true costs of shares – including those you might have overlooked
• The fees you're likely to pay
• How Capital Gains Tax (CGT) affects your returns.

When working out your potential profit from share investments, you need to factor in all the costs involved, whether these are the actual trading charges themselves or advisory and broker fees.

The ‘bid-offer spread’

There is some jargon you'll need to learn when trading shares. One of the most common terms associated with stock dealing is the so-called ‘bid-offer spread’.

The ‘bid’ refers to the price a buyer is willing to pay for shares. The ‘offer’ is the price a seller is looking to get for the stock. The gap between the two prices, and there always is a gap, with the bid being the higher, is known as the ‘spread’. For shares that trade very frequently, this difference is likely to be quite narrow.

Commission

Whether you are buying or selling stock, your broker’s commission must always be factored into the overall value of the transaction. It is vital that you find out at the start what this will be. Commission can be charged at a flat rate or as a percentage. Which structure you’ll be better off with will largely depend on how often you trade and the value of those trades.

Other factors impacting the rate you're charged will be the type of shares you trade. For example, dealing in shares listed on international exchanges is typically more expensive than dealing with domestic stocks. In addition, how you place the deal will have an effect too. For example, the charges for dealing over the telephone may be higher than dealing online. Be aware that costs eat into your investment returns, so it's important to find out about the full range of charges from the start and always look to see how you could reduce them. Most online brokers and self-direct investment services, such as Smart Investor, will have their commission charges outlined on their websites.

Find out more about Our Fees

Stamp Duty

When it comes to Stamp Duty charges, these are incurred by buyers but not sellers.

If you buy shares electronically, you'll pay the Stamp Duty Reserve Tax (SDRT) at 0.5% on the transaction.

A full update on Stamp Duty charges is available on the government's information page on tax when you buy shares.

However you won't pay Stamp Duty if you are buying:

• Shares up to £50,000 as an employee of the company
• A new issue of shares in a company
• Exchange-traded funds (ETFs)
• Units in a unit trust
• Shares in an Open-ended investment company (OEIC)
  
• Foreign shares outside the UK (but there may be other taxes to pay)

Calculating your Capital Gains Tax (CGT)

If the profits you've made from the sale of shares go over your annual Capital Gains Tax (CGT) allowance, then expect a tax charge on the excess. The 2024-25 CGT allowance is £3,000. It is down to investors to inform HMRC of capital gains made through their self-assessment tax returns. If you are unsure which costs you can offset against the gains made, then seek professional tax advice. Some costs are not deductible, for example, advisory fees. You can work out any CGT liability on profits made from shares with up-to-date information here.

If your calculations show that after subtracting losses from gains, you make an overall loss in a tax year, inform HMRC on submission of your tax return. This loss can be carried forward to reduce the liability on gains made in future years.

However, don’t forget your individual savings account (ISA) allowance, where you have a maximum contribution threshold of £20,000 in the 2024-25 tax year and where you don’t have to pay CGT on profits made from rises in the price of shares held in an investment ISA.

Remember though that tax rules can and might change in the future and that the value of any favourable treatment to you will depend on your individual circumstances.

Stockbroking services

There are three levels of service investors can choose from.

Discretionary

You'll need approximately £100,000 to invest via a discretionary service. This route however offers you expert management with a broker deciding what to buy and sell and carrying out all transactions on your behalf. Depending on the firm and service, annual management fees work out at around 1-1.5% of your portfolio's value.

Advisory

As the name suggests, with this option, you are getting advice on what to buy and sell from a stockbroker. Bear in mind however that the ultimate decisions remain yours but there's usually a full consultation involved, for which you are likely to have to pay a fee.

Execution-only

This is a service provided by online share dealing platforms, like Smart Investor, where investors can buy and sell themselves for very low costs. With an execution-only service, investors make all of their own investment decisions and the broker offers no advice, so it is important to ensure you're comfortable with this before getting started.

Share dealing strategies

Here's a range of order types you can use to help you buy and sell shares at the optimum price.

• At best order – this is an order you give a broker to buy or sell shares at the best price available at the time the order is placed.
• Limit order – this order lets you set a price for shares above which you won't buy and/or below which you won't sell.
• Stop loss – a stop loss order offers some protection against sharp falls in a company's share price. To set one up, you confirm the number of shares to sell or the amount of money involved. The order confirms the price at which you want to execute the sell order
• Rising buy order/stop buy order – you can apply a rising buy order (also known as a stop buy order) for a company whose share price you believe is on the rise. You want to buy as the share price starts to rise, but there's a certain price above which you are not prepared to go.