Friday 2 September 2011

Do fund prices vary between brokers?

Question
In the recent stock market dips, I've made multiple investments and I've noticed that I seem to get better deals through some companies that others...

* Buying Unit Trusts through Hargreaves Lansdown, I always seem to buy at the lowest price of the day ( or lower! )

* Buying Investment Trusts through Halifax, sometimes I buy at a low price for the day, but sometimes it's near the high point for the day.

* Buying Unit Trusts through Cofunds seemes to get me near to the best price of the day.

Is there a difference between different companies trading policies, or is there a difference in the markets between ITs and UTs? They all seem to claim to get 'best price' but some seem to be better at doing so than others - or will it even out once I've made hundreds of transactions?Answer
Ignoring any initial charge discounts, unit trust prices shouldn't vary between brokers. That's because most are only priced once a day - the fund publishes its buying and selling prices, typically at a fixed time between 10am and 3pm, and these are the same for everyone. Trading is normally on a 'forward' basis, which means your trade will be carried out at the next published price, so you can't be certain of the price you'll get when you place the deal.

So buy a fund via Hargreaves Lansdown and Cofunds and the price should be the same, unless Hargreaves Lansdown gives a bigger initial charge discount on that fund, in which case you'd expect the buying price to be lower.

A quick example helps to explain this point. Suppose a fund has a buying price of 100p and a 5% initial charge, you'd expect the selling price to be 95p (in practice it'd be slightly less due to other costs such as stamp duty within the fund, but let's ignore these to keep things simple). If there's no initial charge discount you'd buy units at 100p, but assuming a full initial charge discount you'd buy the same units at 95p - much better!

Investment trusts are different as they're priced in real time, just like conventional shares, so the price can vary throughout the day. Stockbrokers are under an obligation to attain the best price they practically can when buying and selling shares.

In practice this means the prices of more popular investment trusts should be very similar, if not identical, across all stockbrokers. When it comes to less frequently traded investment trusts it can be harder to find buyers and sellers, potentially giving rise to a variance in prices - it may be that one stockbroker uses a market maker (basically a middle man) offering more favourable prices than another.

Read this Q and A at http://www.candidmoney.com/questions/question565.aspx

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