Are you, like so many others, looking to start trading stocks online?
Welcome to our introduction guide on how to trade stocks. In an attempt to help our readers perform at the top of their ability, we want to share all our top trading tips for beginners and intermediate traders.
Our team hopes that this will help create a safer and more fair trading environment for everyone in the UK. This also means that we’re keeping our guide honest and transparent, not shying away from highlighting the truth about stocks and the risks associated with trading.
If you’re not sure what stocks are or how you best trade them, you’ll find all the answers you need below.
The Basics of Stock Trading
With the intention of being as thorough as possible, we’ll start with the very basics of stock trading and stocks as an instrument.
Some of you might already have an understanding of stocks, and if so, then by all means skip to the next section of the guide. Or read through the following paragraphs to refresh your memory.
The idea of stock trading is that you buy and sell stocks intending to make a profit in the process. There are several ways one can do this and we aim to provide a better understanding of the fundamental aspects in this guide.
What is a Stock?
A stock, also known as a share or equity, is a financial security that represents the fractional ownership of a company. The stock gives the owner a right to some of the said companies profits and assets.
Company profits are shared with stockholders through dividends equal to the number of stocks that each person holds.
It also provides the owner with the right to sell and trade the stocks on stock exchanges and, in some cases, directly with others.
What’s a Stock Exchange?
A publicly listed company is a company that’s listed on a major stock exchange somewhere in the world. Almost every country in the world has its own security exchanges, including stock exchanges, and there are some regional exchanges as well.
- London Stock Exchange (LSE) – the main stock exchange in the UK.
- Euronext – the official stock exchange of the European Union.
- Nasdaq Nordic – a stock exchange for companies registered in Scandinavia.
- Bombay Stock Exchange – one of the biggest exchanges in Asia.
How do you Trade Stocks?
Before we can start to provide more hands-on trading tips, we have to look closer at the different ways one can trade stocks online.
This will determine which type of broker you should sign up for, the amount of capital you need available, as well as the strategies you’re going to implement. Therefore, you must understand the most popular forms of online stock trading.
On Stock Exchanges
Most stocks are, in fact, not traded using online brokers. Instead, they’re traded on the stock exchanges, usually by major investment firms and banks.
The reason why most stocks are sold this way is because of the massive number of stocks sold in most trades. Since banks can often place several million pounds on each trade, they have the ability to trade huge numbers of stocks.
However, for retail stock traders and professional day traders, online brokers are still the more efficient and superior alternative.
Online stock trading is rather self-explanatory. It entails trading stocks using an online platform which, in turn, is provided through an online broker.
In many cases, these brokers do not provide Direct Market Access (DMA), meaning you will trade derivatives and instruments based on underlying securities instead.
One of the main benefits of derivatives is that you can pick your investment amount. For example, in order to buy stock in Tesla, you have to pay the price for a full stock which is several hundred pounds.
When buying the Tesla stock as a derivative, on the other hand, you can usually invest as much or as little as you please.
Today, the two most popular stock derivatives to trade online are:
Contract for Differences (CFD)
A CFD is a derivative based on an underlying asset, such as a stock, a commodity or even a currency pair. These can be traded with most online stock brokers and it gives the broker a chance to offer stocks from all over the world, creating their own mini-stock exchange with stocks aimed at their target group.
CFD trading also provides the option of using margin and leverage to increase one’s exposure in each position. The CFD trading platforms are also created in a way that allows for both long and short positions, but more about that shortly.
- Wildly-available online
- Long and short stock trading
- Adjustable to your budget
- High taxes on all profits
- Does not give the right do dividends
Spread betting can best be described as a combination of stock trading and online betting, hence the name. It involves the trader betting on whether he or she believes the value of a stock (or other security) will increase or decrease in value.
Due to its similarities to regular betting, spread betting normally feels more attainable than regular trading for those that have some experience with sports betting. Moreover, since it’s classified as betting and not trading in the UK, it is completely tax-free.
- Tax-free in the UK
- Easy to learn
- Adjustable to your budget
- Technically, and according to the government, it’s not actually stock trading
- Does not give the right to dividends or other stockholder benefits
Finding a Broker
To learn the basics of stock trading, you need access to a platform that allows you to practice trading. This is especially important if you’re a complete beginner.
Back in the day, one had to open a trading account and risk real money to practice, but today, one can use a demo account that is provided by all the top stockbrokers in the UK, which brings us onto the next topic.
Finding the right broker is going to be one of the most important things you do in your trading career. In many ways, the broker will act as an extension of you, and to perform at the best of your ability, you need to be picky in your decision.
This is where TradingGuide.co.uk enters the picture.
This site intends to educate UK online traders, as well as to embrace safe and regulated trading. Therefore, our team is tirelessly reviewing the market, auditing brokers, and creating recommendations.
Please read more about our in-depth reviewing process on the About Us page.
We follow very strict requirements when reviewing brokers, and so should you. The most important factors to take into account are:
1. Safety & Licensing
The main concern when trading is safety. Some of the risks involved in stock trading cannot be avoided, such as the risk of losing any or all invested funds. However, there are also some risks that can and should be avoided.
By only relying on regulated brokers with licenses issued by the FCA – and preferably multiple other governing bodies – you ensure that your personal information and funds are kept safe.
It also ensures that the broker has to offer fair trading conditions and that they follow the European Union’s trading directive, MiFID II.
Naturally, learning the right trading strategies also help minimise risk, but more about that in the next section.
2. Fees & Commission
Trading for real money is never free. Even when trading is marketed as completely free, there is usually a small print listing the exceptions.
With the fact that online brokers are profitable companies, they have to make money somehow. They do this through various broker fees, mainly commission and spread.
Generally speaking, commission is charged on long-term investments and positions, usually directly on the associated exchange. Spread, on the other hand, is what most online derivatives brokers charge.
The commission is a straight fee, typically a percentage, that’s added to every trade. Spread is the difference between the buy and sale price of an asset.
3. Assets & Platforms
Maybe it goes without saying, but you have to find a broker that offers the assets and instruments you want to trade, on a platform that you feel comfortable using.
Today, there are several trading platforms offered. Some are developed in-house by the brokers themselves, while others are third-party platforms offered by several brokers. In our opinion, the best way to find the right platform is to use a demo account.
Regarding the assets, we believe that “the more, the merrier”. When trading stocks or any other assets, you want the ability to pick and choose which instruments to focus on.
By using a broker offering just 500 stocks, your options will be greatly limited.
Therefore, we encourage you to use a broker with at least a few thousand shares on offer. One of the great benefits of CFD and spread betting brokers is that they usually offer several markets, including stocks, and forex.
4. User Reviews
We strongly believe that you can’t base your broker pick solely on your own research and opinion.
Because of this, we always include user reviews from Trustpilot, the App Store, Google Play, and other similar platforms, when reviewing brokers. We encourage you to check the user reviews as well.
For your convenience, we collect millions of user reviews and share them in our guides and broker reviews. By doing this, we’re able to create the most transparent and accurate recommendations online.
Also, since we’re not able to filter the reviews, you can always rest assured that we remain unbiased about the brokers we cover.
Getting Started Trading Stocks
Before we provide some useful insights into basic stock trading strategies, we want to emphasise that stock trading is very difficult.
The truth is that up to 89% of all retail, online traders lose money in the end. That means you have to be willing to either dedicate a lot of effort to mastering stock trading, or accept that you may never break even.
At the same time, we don’t want to discourage you from trading and the excitement that it offers. Just remember that it’s time-consuming undertaking and, if you put the work in, you can open doors to new ways of making profits, almost effortless.
Learn Stock Trading: Basic Strategies
When trading stocks online, you follow short-term trading strategies. Technically, most professional brokers end up developing their own strategies. And we encourage you to try and do the same.
With that said, you have to get started by learning the most basic strategies. Luckily, we live in a time where everyone has access to an endless resource of free information. By using sites like ours, online trading guides, videos, and other similar tools, you can learn almost everything there is to know about trading, for free.
In addition, there is a huge array of excellent trading books and physical courses that one can attend to learn to trade.
Although, before you get into that, you should understand the most basic trading methods.
To many, day trading is synonymous with a lavish lifestyle and endless amounts of money. As it’s often the case, the truth is far from that.
Day trading is a way to trade instruments and assets where positions are opened and closed within the same day, often within the same hour. Forex (currencies) and stocks are the two most popular markets for day traders.
As you can imagine, this type of trading requires a broad understanding of how financial markets operate, to predict short-term price movements. Therefore, learning to day trade is both tedious and difficult.
Although, for those that master day trading, there are endless opportunities to make profits.
Swing trading is very similar to day trading, with the exception that the trader keeps its positions open for longer periods of times, often several days and weeks at a time.
According to most experts, this makes swing trading slightly easier to master than day trading. And therefore, potentially better suited for beginners.
One of the downsides with swing trading derivatives is that online stock brokers often take out an overnight fee, meaning you will have to pay a lot more to keep your positions open for longer than you would if you closed all your positions before the stock markets closed.
Long vs Short Trading
A long position (not to be confused with a long-term position) is a position placed with the prediction that an instrument will increase in value. A short position, on the other hand, is a trade where the trader predicts that the value of the said instrument will decrease in value.
When trading stocks as CFDs or partaking in spread betting online, it is as easy to place a long position as it is to place a short position. That is not the case when investing in stocks, since short positions become more complicated.
Having access to a platform that supports both long and short positions is always an asset. Just keep in mind that many professional traders rarely short instruments, since it’s associated with higher risks than long positions.
Leverage & Margins
Another fundamental factor of stock trading strategies online is the use of leverage and margin.
Leverage is basically a loan provided by your broker that’s used to increase your exposure on any position. Using leverage means that you increase your potential profits, while also increasing the potential losses.
Due to the increased risk associated with leveraged trading, there are strict regulations in place in all of Europe. For example, leverage is limited to 20:1 for major currency pairs and 10:1 for major stocks.
A few years back, negative balance protection was also implemented, saving traders from losing more money than they could afford.
NOTE: Leveraged trading is associated with high risk and should not be taken lightly. Only use leverage and margin if you understand the consequences and have performed a thorough analysis of the instrument you’re trading.
On the other side of the spectrum, we find traditional long-term investments. Technically, this is a whole other issue and market, which is why we’ve also covered the basics of long-term investments on this site.
There are many major differences between stock investments and trading. Namely, that you buy stocks and can keep them for years before selling them.
In addition, as a stock owner, you gain certain rights to be active in the company. For example, you will receive dividends and, in some cases, even a voting right when big company decisions are being made.
Our point is that long-term investments and trading are very different, even though you’re technically active on the same market and buying/selling the same instruments.
With that being said, many of the top online trading brokers also offer options to place longer investments, meaning you can combine short-term strategies with long-term investment plans.