Why Different Strategies Are Needed For Small And Large Portfolios

It may sound obvious but just because you want to buy a share it doesn't mean that there are any available.

Many Shares Are Not Readily Available In Large Volumes

At first glance it may seem that you can use the same strategy regardless of the amount that you have to invest, unfortunately this is not so.

Unless you do something really odd and difficult, when you open your share dealing account you will not be buying and selling shares on a stock exchange.

You will be buying and selling to a panel of Retail Service Providers.

This means that there will always be a limited supply of shares available to buy and a limited market to sell to at a given price.

Occasionally limited may even mean zero.

Some platforms will put your order on the relevant exchange, but buying and selling in retail quantities can be a bit hit and miss.

If you are buying £1K worth you probably won't notice this, buying £5K worth you will sometimes notice this and buying £10K worth you certainly will.

As an example is Countrywide trading in very low volumes.

Direct Market Access Or Retail Service Provider?

As a private investor there are in theory two ways to buy or sell shares, through a broker or web site that uses a Retail Service Provider or one that provides Direct Market Access.

The Direct Market Access route is seen as a much more "Professional" route, it comes with much higher fees and will probably not be available from your chosen broker.

Even if it is available there will be restrictions on who can open this type of account, because a DMA account exposes the broker to the consequences of your actions and regulations require that the broker can prove that you are competent to operate such an account.

In other words there are very few upsides to the broker in offering a DMA account, and just to make it even more confusing there are some accounts that appear to be DMA accounts but are in fact CFD accounts.

The upside of a DMA account is that your £1K trade is visible to fund managers used to buying and selling in £1M blocks, and your risky £20K is not blocked by a RSP unwilling to risk the transaction.

In practice you are almost certain to start with a broker using a panel of RSPs and quite probably never progress to DMA.

When you want to buy or sell shares, your trading platform will contact a number of RSPs who will typically offer to buy or sell to you, but the quantity that they will offer may be quite small such as less than £10K worth. With very volatile prices, such as those that occur when there is an unexpected announcement, the RSP may not offer a price at all.

Generally the amount offered is dependent upon the number of shares normally traded, so a big bank like Barclays will support larger trades than a small AIM listed company.

When you start out £10K may seem like a lot of money, but after a few years it will not and if you doing things right you will experience issues with buying or selling in the desired quantity.

On a normal day, you will be able to buy or sell more than the minimum, but if you plan to buy and sell at times of significant price volatility, then you may find that your normal sized trade will be rejected, say a £10K trade, but three £3.33K trades would be accepted.

If you are really unlucky you will not be able to trade at a guaranteed price at all, your trading platform may offer to buy or sell at the best market price, which you will not know until after the transaction.

Once your pots get over £5K-£10K expect to have to do multiple buys and sells to be able to buy or sell the number that you want, this is true even for large companies with capitalisation in the hundreds of millions.

This requirement for multiple transactions may sound trivial, but it has two main problems.
  • The time taken, log on, sell a block, log off, wait for an unknown period of time and log on again, sell some more, log off, wait some more time.

  • The dealing costs, if the dealing fee is £10 per transaction and you need to purchase in 3 blocks and sell in 7 blocks then the dealing fee is £100. I have found in practice that it is easier to buy a larger block than it is to sell it.

  • More admin, if you sold in 7 blocks that is 7 dealing notes to enter in your record keeping system, if you have one.

As an example, looking at Lamprell (LON:LMI) at 11:53 on 21/Nov/2012, about 323K shares have changed hands at around 80pence. This is about £258K worth.

It clearly follows from this that one purchase for £50K worth of shares would represents a huge percentage of the day's trades. This order will probably be rejected as it would leave the RSP dangerously exposed.

At the same time, Barclays (LON:BARC) has traded 8.5M shares at £2.50, in this case, a £50K trade represents a much smaller portion of the days trade.

On the home page we talked about limits for this strategy and once your fund is at £100K you can
  • Try and find 10 companies to trade £10K pots, but you are unlikely to find that many.

  • Put multiple pots into the same company which is fine up to a point.

  • Leave funds idle.

It may be hard to believe but if you are considering putting £100K into one company you may find that as well as having to make maybe 10 - 20 transactions over the day to achieve this, your purchases alone may push the price up.

If your fund is much less than £5K then the amount of money that you will be gaining from trades will be quite small, 4% of £2K is clearly £80, stamp duty and dealing fees will eat heavily into this. The advantage of this is that you will very little to lose as you learn how to trade.

If you see the £80 gain from £2K investment as too risky then you are not ready for any trading strategy, there is no shame in this.

Once you have got your pot up to £100K you will be an experienced trader and will have developed your own strategy for the future.

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