A great service that could revolutionise share dealing with its pricing model alone... if you're willing to put up with its limitations.
Woke 👌 So damned cheap that most trades are free, really user-friendly user interface with no annoying complications, cheap ISA facility, decent choice of large-cap shares from the UK and the US, good for ETFs, effective customer service
Broke 🙁 Restricted choice of shares outside of large-cap UK and US shares, could be better for investment trusts and mid-cap stocks, useless stock info pages and especially charting functions, no ISA transfers (yet)
Freetrade is a great app/service that should revolutionise share dealing. It’s a brilliantly cheap way to get into long term investing and even for experienced investors willing to put up with the limitations, this is a great service. But it could do with many improvements not least the share info pages and the limited choice of stocks. Nevertheless, it’s hard to argue with free dealing and cheap ISA wrappers.
Setting up (4/5)
It has to be said that Freetrade was operating a slightly mysterious waiting list before Christmas. From memory, I was up in the 70,000’s and then suddenly I was magically transported into active status. The process was all a bit mysterious, but matters not.
Now you can download the app and start straight away. The first key decision is to decide whether to have a general investment account or a tax wrapper called an ISA. For more details on the ISA see the section below.
If you go for this option you’ll need to provide not only your address and name, but also your National Insurance number.
Next up, you’ll have to specify a linked bank account which you’ll need to use to fund the account. Freetrade will also provide you with a reference number to make on all transfers into the account – if you don’t use it they’ll struggle to allocate the money to your account. This linked account has to be used – if you use other banking sources they may return the money.
Once you’ve got these out of the way – and set up is quick – you are ready to trade.
Stocks and shares ISAs are a tax wrapper that allows you to invest up to £20,000 per annum in an account free of tax. With pensions you get tax relief on the way in, but with an ISA you don’t get any tax subsidy.
That means if you invest £1, you’ll only have £1 in the account, unlike a pension. With an ISA there are rules about what you can and can’t invest in using an ISA but the good news is that the vast majority of stocks on the UK and US exchanges are open to ISA accounts.
My own view is that ISAs are every bit as compelling an investment proposition as a pension, and personally I prefer to put money into an ISA over a pension.
Freetrade charges £3 a month for their ISA, although it is currently free until July. £36 per annum for an ISA is a great value, and certainly one of the most competitive rates in the market.
My honest opinion is that I would always open an ISA first and then use up your full £20,000 allowance before opening up either a general investment account or a pension.
One last point. Remember that you can only use pay into one active ISA account per tax year. You can have ISAs from other providers for other tax years but you cannot pay into TWO active ISA accounts in the same year.
Buying stocks (4/5)
The customer interface on Freetrade is a doddle to use. It may not appeal to the very experienced investor who likes to see a wealth of information, but my hunch is that, for most of us, it’s enough. The Freetrade interface is clean, with simple signposting and not too much clutter. First rate.
Once you log in, you go to the Account activity page where you see a summary of your open portfolio landing page which lists positions. In an ideal world, I’d quite like to see a bit of analysis about how your portfolio has performed, but beggars can’t be choosers and the little chart will suffice for most.
If you want to buy a stock you then go to the Discover tab at the bottom of the page and you’ll instantly see a long list of stocks in the system you can buy (and sell). By my calculations as of mid-May these consist of:
343 stocks in total, of which:
220 UK sterling stocks
123 US dollar stocks
31 Investment trusts
That’s not a bad start, although it is far from the entire universe of US and UK stocks.
Some immediate observations: first there are no European stocks; next up, it’s very large cap and technology-focused ETF coverage is OK, but a bit too iShares/BlackRock-focused for my liking; investment trusts – which are an excellent investment tool – are covered but there’s nowhere near enough. Again, personally, I would like to see many more ETFs and investment trusts inside the Discover option.
Once you pick a stock you would like to buy, you’ll then see the share details page. This is a nice, simple interface which includes a chart showing relative price performance over varying time scales, price stats and a short blurb about the stock. You are then given the option to buy or sell.
The price chart is, in my honest opinion, almost as useful as a chocolate teapot. It really doesn’t tell you very much information in respect of historical performance. The About section is fine but a little skimpy and the stats don’t include the bid-offer range (asking/selling price range). You can’t find that information anywhere on the system.
Once you’ve decided to buy a share you then move into the Buy share page which asks you the amount you want to invest, as well as how many shares that equals.
You are also confronted with a crucial choice. You can either buy through an instant order, where the buy order is placed immediately, or you can use the basic order where the deal is placed at the end of the day at 4pm – with the best available price at the time. Basic orders are FREE but Instant Orders cost £1.
Does this choice matter? Arguably if you are a long term buy and hold investor then a Basic Free Order will be quite enough. You may not buy the stock at the time of your choosing but in the great schema of things, it won't be a big deal.
Theoretically, if Freetrade became absolutely huge, experienced hedge funds could suddenly start tracking popular shares in the Freetrade system and then try and manipulate the price at around 4pm. But nearly all the stocks in the system are very liquid mega caps and there’s almost no chance of that manipulation having a major impact at the moment. But this end of day purchasing (and selling) process could have a huge impact on small cap, less liquid stocks which is why Freetrade will probably never expand its range of stocks vastly.
Note: you can always cancel a Basic Trade before 4pm during the day if you decide you don’t want to go through with it.
Once you’ve confirmed your order, you go through various confirmation pages and receive a final confirmation summary.
Portfolio monitoring (3/5)
The main Portfolio tab allows you to see the list of stocks in your portfolio and any queued order. There’s also a slightly bizarre chart that shows you the total value of your portfolio over time.
To say that portfolio monitoring is basic is I think an understatement. I would go so far as to say that it is almost useless when it comes to proper analysis. Much better to use a proper analysis service such as Sharepad, which offers you industrial grade analytics, but you’ll have to pay for these services.
Customer service (4/5)
You access customers services via Personal Account icon at the top right-hand corner of the app. This then throws up your basic information plus Help and Support. From here, you’ll see Live Chat.
In my experience so far, the speed of reply on Live Chat is pretty impressive though not instantaneous and the customer service staff are very helpful and on the ball. Whether this will change as more investors use the service is anyone’s guess but so far I’d say customer service is excellent.
There doesn’t seem to be any way of working out what the bid-offer spread is on basic trades. This could make a big difference if that spread is above 1%. You also thus don’t have any way of comparing Freetrade’s bid-offer spread against other platforms.
Dividend reinvestment. Many big companies pay out a regular dividend. A very effective way of saving for the long term is to take these dividend cheques and then reinvest them in the underlying shares. Over the long term, this dividend reinvestment is a huge driver of total returns. Quite a few of Freetrade’s rivals offer an automatic reinvestment system, usually for a charge of about £1, which automates the process. This isn’t offered by Freetrade but then again dealing is free, so you could simply remind yourself to buy some more shares with that dividend payment.
Talking of automated processes, many rival platforms also offer automatic monthly purchasing of shares, usually in funds. This makes long term investing simple. Freetrade doesn’t offer this facility which means you need to remember to trade. This is especially problematic during stock market booms and busts. You might be tempted to stop buying (thinking stocks are expensive) or buy more (if you think they are cheap). These behavioural impulses can result in you timing the market, which is usually a bad idea. Better to have automatic processes that avoid you making decisions.
But Freetrade is trying its best to make sure these fiddly details work. They’ve told me that dividend reinvestment is something they are looking at. In the meantime, it’s worth noting that the FX spread used on any foreign currency (dollars for US shares) transactions is really quite tight – running at a 0.45% spread. This means that change pounds into dollars, there will be a 0.45% spread. This cheaper than some much bigger competitors who charge utterly outrageous amounts of money with spreads of over 1% uncommon. But it's also true that other competitors charge much less – 0.30% strikes me as about the most competitive you could get. So, an even tighter spread might be one thing for Freetrade to consider.
W-8BEN – If you want to invest in US shares you’ll have to fill out a US tax form called the W-8BEN which allows you to avoid some of the withholding tax paid on US businesses paying a dividend. To Freetrade’s credit, this process is dead simple on their platform and takes just a few clicks.
Investor Guides – Freetrade also offers a growing library of content about how to invest. Over time it would be nice of Freetrade could offer more of its own content, with evergreen guides about what works – and what doesn’t – in investing.
Freetrade is in a class of its own in terms of costs and product set. There are other really very cheap share dealing services available with eToro in my view offering the next best bet. This Israeli service has zero commission trades and even manages to avoid stamp duty charges but it is not an onshore London Stock Exchange member (like Freetrade) – and doesn’t have an ISA.
The nearest effective competitor is probably the Dutch-owned Degiro, which is as close as you can get to a full-service online broker but it charges a (small) fee for each trade and doesn’t offer an ISA. That puts Freetrade in a class of its own. It's really easy to use, with good customer service and I think should appeal even to experienced (possibly older) private investors. There are some flaws and some things we’d like changed/improved such as the range of available stocks, but these are small challenges compared to the overall pluses.
For anyone looking to build a long term portfolio at low cost in an ISA wrapper, this is a million times better than the established platforms.
Setting up (5/5)
Buying stocks (4/5)
Portfolio monitoring (4.5/5)
Customer service (4/5)
Overall score: 4/5