Key Post The different ways for investing directly in the stock market

[Brendan Burgess]

This thread is for someone who has decided to invest directly in the stock market.

• It is not to discuss the wisdom of investing.
• It is not to discuss investing via a pension fund

I want to describe the different methods, explain how to invest , explain the taxation and set out the pros and cons.

Work in progress - please correct any errors - in particular, I am struggling with summarising the ETF situation so would welcome any rewriting of that by someone with direct experience.

There are three main routes to investing directly;

1. Buy a portfolio of shares directly via a stockbroker
2. Invest in a unit-linked fund via an investment advisor or your bank
3. Invest in an Exchange Traded Fund via a stockbroker

 

[Brendan Burgess]

Buy a portfolio of shares directly

Description
You pick, say 10 publicly quoted companies, e.g. CRH, Ryanair, Apple.
The share price goes up and down.
The companies usually pay dividends once or twice a year.


Methodology
Open an account with a stock broker e.g. Davy Online
Lodge money to your account
Pick a selection of shares

The dividends are paid directly into your Davy Account
Every year, Davy will send you a Tax Pack listing out all the dividends you received

Typical Costs
When you buy shares, you pay 0.5% commission to Davy's and for Irish shares, 1% stamp duty.
When you sell shares you pay 0.5% commission to Davy's
Davy's will also charge you account maintenance fees of €200 per year.

(There are other cheaper online brokers e.g. De Giro)

These are costs for people who adopt the recommended buy and hold strategy. This means that you buy your shares and hold them for the long term. You don't trade i.e. selling shares when you get a "feeling" about them and "buying" other ones. Trading costs like these eat up the returns.

Taxation
Your dividends will be subject to income tax, USC and PRSI at your top rate e.g. typically a combined rate of 50%
When you sell your shares any gains will be subject to Capital Gains Tax at 33%.
If you still own the shares when you die - the liability for CGT disappears.

Advantages
The big advantage is that this is the lowest cost method of investing - assuming you adopt a buy and hold strategy. However, if you become cocky and decide to trade shares, then it becomes a very expensive way of investing.

It's very tax effective for retired people who die while still holding the shares as the liability for Capital Gains Tax disappears.

Disadvantages
There is some administration involved and you will have to do a tax-return.
In practice, you will buy at most 10 shares and while this is not much riskier than investing in 100 shares, your portfolio is less likely to contain a star performer like Apple or Microsoft.

 

[Brendan Burgess]

Buying a unit-linked fund via an investment advisor or through your bank

Description

These are generally issued by life insurance companies such as Irish Life or New Ireland and have names such as Irish Life Multi Asset Portfolio Fund 2 or Bank of Ireland Evergreen Fund

The fund pools your money with everyone else's and buys a large portfolio of shares - maybe 1,000 shares. You are issued units in the fund. Every day the units are valued based on the values of the shares in the fund.

They collect the dividends and increase the value of the units as the dividends are received.


Methodology
You fill in the forms with your advisor or the salesperson in the bank, choose which fund to invest in, and then transfer the money to the company and they issue you with a certificate for your investment.

When you want to cash some or all of your investment, you just notify them and they issue you the current value of the fund less the taxation on it.

Costs
The costs of these investments are very high and they are not easy to find out. Here is what Bank of Ireland says about their funds:

A 1% Government levy applies to all money invested. An annual management fee will be applied, taken as a percentage of the policy value. This is typically 1-2%, depending on how your money is invested. Early exit charges may also apply if you withdraw any of your investment during the first few years. A small fee also applies on partial withdrawals.

An annual management fee of 2% might not sound like a lot. But if the annual return on your investment before the charge is 5%, 2% represents a 40% charge. It is huge.



Taxation
When you exit the fund, the company will deduct 41% exit tax on any profits. There is nothing further to pay.
If you hold the fund more than 8 years, the fund will deduct 41% tax at that stage.
If you die when you hold the fund, the 41% tax will be deducted before the net proceeds are paid to your estate.

Advantages
Very little administration
Very widely invested so the fund should contain a few superstar performers.

Disadvantages
Very high charges and not always transparent.

• There could be initial charges and exit charges
• There would be an annual management charge - typically 1% which sounds small, but has a significant negative effect on your return. Some funds have much higher charges.
• There could be high transaction charges as they buy and sell the underlying shares.

Taxation is very high if you die while you hold them. Your estate will pay 41% exit tax compared to 0% Capital Gains Tax on directly held investments.

 

[Brendan Burgess]

Buying an Exchange Traded Fund via a stock broker

Description
An Exchange Traded Fund is a collective investment similar to a unit-linked fund.
You buy units in the fund.
The big difference is that the charges are usually much, much lower.

Typical names would be...

Methodology
You buy these through a stockbroker.
And when you need to cash one in, you sell it again via your stockbroker.

Tax treatment
Unfortunately, this is very, very unclear and complicated.
Some are taxed like unit-linked funds with exit taxes at 41%.
Some are taxed like shares.

Many people invested in ETFs on the understanding that they would be taxed like shares, but this no longer seems to be the case. There is a long discussion in this thread but some very well informed posters can't agree on how they are taxed.

Advantages
The big advantage is low charges.

Disadvantages
Lack of clarity on the tax treatment.

 

[Brendan Burgess]

Some alternatives

There are some individual companies which themselves are well diversified e.g. Warren Buffet's Berkshire Hathaway. Some people consider investing all their money in these give them adequate diversification.

There are also companies quoted on the stock market called Investment Trusts. They are not trading companies themselves, but buy shares in other companies in much the same way as unit linked funds or investment trusts do. These companies are usually, but not always, taxed as ordinary companies.

 

[Brendan Burgess]

FAQ on directly owned shares
To be completed

 

[Brendan Burgess]

FAQ on unit linked funds

 

[Brendan Burgess]

FAQ on ETFs

 

[AJAM]

	Stamp Duty	Tax on Gains	Tax on dividends	Foreign Estate Tax	Offset Losses	Notes
Irish Shares	1.0%	33%	FIT	n	y
UK Shares	0.5%	33%	FIT	?	y
US Shares		33%	FIT	y	y
ETF - UCTIS		41%	FIT/ACC	n	n	Accumulating ETFs avoid dividend Tax
Mutual Funds	1% levy	41%	ACC	n	y-within fund
Investment Trusts		33%	FIT	y	y
OEIC/ Unit Trusts		41%	FIT	?	n

FIT = Full Income Tax including PRSI & USC
ACC = Accumulating, i.e. reinvested at 0% Tax

 

[Brendan Burgess]

Hi AJAM

That is an excellent addition. Thank you very much.

As most of us don't consider the Foreign Estate Tax, I have started a new thread on it here:

What US tax is due if I own US assets when I die?

If you own American shares or an American ETF when you die, your estate may be liable to US Foreign Estate Tax. How does it work? Brendan

www.askaboutmoney.com

 

[Marc]

Buying an Exchange Traded Fund via a stock broker

Description
An Exchange Traded Fund is a collective investment similar to a unit-linked fund.
You buy units in the fund.
The big difference is that the charges are usually much, much lower.

Typical names would be...

Methodology
You buy these through a stockbroker.
And when you need to cash one in, you sell it again via your stockbroker.

Tax treatment
Unfortunately, this is very, very unclear and complicated.
Some are taxed like unit-linked funds with exit taxes at 41%.
Some are taxed like shares.

Many people invested in ETFs on the understanding that they would be taxed like shares, but this no longer seems to be the case. There is a long discussion in this thread but some very well informed posters can't agree on how they are taxed.

Advantages
The big advantage is low charges.

Disadvantages
Lack of clarity on the tax treatment.

The lack of clarity is simply a function of a lack of understanding of what has changed in Revenue practice. In reality we are simply back to the situation that existed prior to the Revenue Ebrief that was rescinded on 1st September

 

[Marc]

Buy a portfolio of shares directly

Description
You pick, say 10 publicly quoted companies, e.g. CRH, Ryanair, Apple.
The share price goes up and down.
The companies usually pay dividends once or twice a year.


Methodology
Open an account with a stock broker e.g. Davy Online
Lodge money to your account
Pick a selection of shares

The dividends are paid directly into your Davy Account
Every year, Davy will send you a Tax Pack listing out all the dividends you received

Typical Costs
When you buy shares, you pay 0.5% commission to Davy's and for Irish shares, 1% stamp duty.
When you sell shares you pay 0.5% commission to Davy's
Davy's will also charge you account maintenance fees of €200 per year.

(There are other cheaper online brokers e.g. De Giro)

These are costs for people who adopt the recommended buy and hold strategy. This means that you buy your shares and hold them for the long term. You don't trade i.e. selling shares when you get a "feeling" about them and "buying" other ones. Trading costs like these eat up the returns.

Taxation
Your dividends will be subject to income tax, USC and PRSI at your top rate e.g. typically a combined rate of 50%
When you sell your shares any gains will be subject to Capital Gains Tax at 33%.
If you still own the shares when you die - the liability for CGT disappears.

Advantages
The big advantage is that this is the lowest cost method of investing - assuming you adopt a buy and hold strategy. However, if you become cocky and decide to trade shares, then it becomes a very expensive way of investing.

It's very tax effective for retired people who die while still holding the shares as the liability for Capital Gains Tax disappears.

Disadvantages
There is some administration involved and you will have to do a tax-return.
In practice, you will buy at most 10 shares and while this is not much riskier than investing in 100 shares, your portfolio is less likely to contain a star performer like Apple or Microsoft.

This is fundamentally a flawed approach since over time most shares fail to provide a higher return than treasury bills.

The only way to be sure of achieving market returns is to own the market or at least a close approximation of it

 

[Horatio]

	Stamp Duty	Tax on Gains	Tax on dividends	Foreign Estate Tax	Offset Losses	Notes
Irish Shares	1.0%	33%	FIT	n	y
UK Shares	0.5%	33%	FIT	?	y
US Shares		33%	FIT	y	y
ETF - UCTIS		41%	FIT/ACC	n	n	Accumulating ETFs avoid dividend Tax
Mutual Funds	1% levy	41%	ACC	n	y-within fund
Investment Trusts		33%	FIT	y	y
OEIC/ Unit Trusts		41%	FIT	?	n

FIT = Full Income Tax including PRSI & USC
ACC = Accumulating, i.e. reinvested at 0% Tax

Thanks for sharing AJAM, I've been procrastinating putting such a table together for actual years.

 

[Horatio]

Going to love this thread. Nice and crisp. Hats off Brendan.

 

[GSheehy]

Buying an Indexed Global Equity Fund via a unit-linked investment (?)

1% Government Levy off-set by 101% allocation.
0.65% AMC
Other Ongoing Costs 0.01%
TER 0.66%
(Min €5K and early exits 3%/2%/1% in yrs 1/2/3)

Would be good if this thread didn't get mired in the cost comparison of buying a portfolio of shares and buying a multi-asset/mixed fund.

 

[Sarenco]

	Stamp Duty	Tax on Gains	Tax on dividends	Foreign Estate Tax	Offset Losses	Notes
Irish Shares	1.0%	33%	FIT	n	y
UK Shares	0.5%	33%	FIT	?	y
US Shares		33%	FIT	y	y
ETF - UCTIS		41%	FIT/ACC	n	n	Accumulating ETFs avoid dividend Tax
Mutual Funds	1% levy	41%	ACC	n	y-within fund
Investment Trusts		33%	FIT	y	y
OEIC/ Unit Trusts		41%	FIT	?	n

FIT = Full Income Tax including PRSI & USC
ACC = Accumulating, i.e. reinvested at 0% Tax

One small nit - dividends paid by a UCITS ETF are taxable at 41%, not FIT.

 

[Brendan Burgess]

Folks as the Estate Tax on US assets is so complex, I have started a new thread.

What US tax is due if I own US assets when I die?

If you own American shares or an American ETF when you die, your estate may be liable to US Foreign Estate Tax. How does it work? Brendan

www.askaboutmoney.com

 

[pjuegos]

I still hold the US domiciled ETFs I bought with Degiro, but I cannot buy them anymore in Degiro or Interactive Brokers

I presume, 2 years after Brexit, the taxation of UK domiciled ETFs is still treated the same as EU domiciled ETFs?

 

[DK123]

I have some money in an EBS Summit Growth fund for a good number of years.Advantages =1.Almost no administration hassle which suits my temperament perfectly .2.It holds 70 to 100 different shares in different countries=Sound sleep!!!.3 There is the possibility of a few superstar performers.4.There is no 41% tax every 8 years.This does not apply as the tax is 30% and is absorbed into the fund over time.[ I think that the temperament of the individual is important when choosing an investment method.] Yes the annual management cost is probably a bit high but it is difficult to have it every way.

 

[Corola]

	Stamp Duty	Tax on Gains	Tax on dividends	Foreign Estate Tax	Offset Losses	Notes
Irish Shares	1.0%	33%	FIT	n	y
UK Shares	0.5%	33%	FIT	?	y
US Shares		33%	FIT	y	y
ETF - UCTIS		41%	FIT/ACC	n	n	Accumulating ETFs avoid dividend Tax
Mutual Funds	1% levy	41%	ACC	n	y-within fund
Investment Trusts		33%	FIT	y	y
OEIC/ Unit Trusts		41%	FIT	?	n

FIT = Full Income Tax including PRSI & USC
ACC = Accumulating, i.e. reinvested at 0% Tax

Investment Trusts are also charged 0.5% stamp duty.