Gone are the days when you needed a wardrobe stuffed with pinstriped suits or access to a personal broker to play the stock market. With the internet, anyone can try their hand at trading- and it can be a good way to get a return on your money.
In this guide we’ll explain what to expect- and what to watch out for- if you decide to give online trading a go. We also dish the details on some of the better platforms out there for you to get started on.
If you’re serious about trading, you should be ready to give up some time researching how the markets work. It’s a vital first step, as without this basic knowledge you might as well be gambling your investments away. But, if you’re willing to put in the legwork you could find yourself with a lucrative new hobby.
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In This Guide:
- A quick introduction to online trading
- Helpful resources to get you started
- Find out which online platform is right for you
Important: This article is intended as a guide to how online trading works. It is not financial advice. Always be aware that when trading, the value of your investments can go up as well as down. This means you can lose your capital. If you need financial advice, you should approach a professional broker or adviser.
What Is Online Trading?
Online trading is an umbrella term for buying and selling assets online with the goal of making a profit. You make a profit in trading when the value of your portfolio (all your combined assets) increases with time. How does this happen?
Basically, it all depends on supply and demand. If an asset is in high demand, it’s value increases. Similarly, if many of your fellow traders decide to sell a particular asset over a short period of time,
is value falls. One of the most important aspects of trading successfully is recognising these patterns and making them work for you.
Online trading is a very general term. In fact, there are many different markets’, each one dealing with a different type of commodities such as stocks, forex or bonds. Not sure what these are? Don’t worry; we’ll go into this a bit more later on. Once you have researched the different markets, you may choose to specialise in trading one type of commodity or be active in several different markets at once.
Who Can Do It?
Anyone over the age of 18 is allowed to trade online. Most trustworthy brokers will also require an ID check and may need to verify your bank accounts before you sign up.
How Much Does It Cost?
There are several costs you’ll need to consider before you decide to start trading.
1. Resources: There are lots of great free resources available online for new traders, but you may decide to spend on additional books, courses or news subscriptions to improve your understanding of how your chosen market works.
2. Investment: Your initial investment will probably be the largest lump-sum cost. How much you invest is really up to you- some platforms have a minimum investment amount, but many do not. You should never invest more than you can afford to lose. No matter how confident you are in your abilities, a few bad days (or just plain old bad luck) could cause you to lose your investment.
3. Platform: Every platform has fees, and for someone with a small-modest investment (up to £5000), these will be one of your biggest expenses. Every platform is different, but a mid-range example of typical fees is: £5 per trade, £10 annual fee for ‘custody’ of your account, and £20 to withdraw your funds.
4. Taxes: Made a profit? Congratulations! Unfortunately for you, if it’s over £12,000, you’ll be liable for capital gains tax. For everyone on the basic rate for income tax, this is set at 10%, and 20% for those on the higher rate. Most new traders won’t make anything like this much money, but its important to report any profits you do make to HMRC.
How Much Can I Earn?
This is a really difficult question to answer because there are so many variables at play, starting with the amount invested. Someone with a 3% return of £30,000 (£900) is clearly earning more than the investor with a 3% return on £500 (£15). So how much you’re able to invest matters.
So too, does your trading strategy. In general, experts agree that a more passive, long-term strategy tends to yield the best results because investors are less likely to panic and pull out when their assets dip or make a risky trade in the hope of making a quick buck.
According to Credit Suisse Global Investment Yearbook (2020), the return on a typical stocks portfolio was around 7.9%. With compound interest applied, this means someone who invested £5000 could double their money over ten years by doing very little.
Generally speaking, the shorter your investment, the higher the risk is of losing it. On the flip side, there is the chance you could make higher profits, too, and there are many trading bloggers who claim they earn returns of up to 10% per month.
However, experts suggest these are probably the lucky few: a 5-year study by the University of California (albeit in the 90s) found that short-term traders did about 33% worse than people who held onto their assets for the long term.
Which Trading Style Is for Me?
Settling on a trading style will help you shape your strategy and portfolio. Different approaches come with different levels of risk and commitment.
Long-term investors may hold a trading position for months or years. Unlike short-term strategies, long-term trading relies more on investments that have sound underlying financials (rather than impressive short-term market performance). Traders make a profit when their investments increase in value over time or when they are paid dividends. Dividends are an annual payout to shareholders of a company’s profit relative to the number of shares they hold.
Day trading is, simply, when a trader tries to profit on the daily price fluctuations of assets by not holding investments for longer than a day. It is one of the riskiest strategies, meaning that they stand to make large profits and losses quickly. Day trading is most common on the forex and stock markets. Traders may rely on statistics, algorithms, or news to react quickly to how they think the market will move. Because of its fast pace, it requires someone who can commit several hours daily to trading. Investors see results (whether good or bad) very quickly.
Swing trading is a happy medium between long-term investing and day trading. Like day trading, swing trading also tries to profit from the price fluctuation of stock. Unlike day trading, it focuses on trends over longer periods of time, ranging from a few days to a few weeks. Many swing traders invest in ‘large cap’ (£10b+) companies, as the fluctuations in their share prices are more pronounced, so there is more potential to make a profit. Steady markets also favour swing traders, whose bread and butter is short-term price fluctuations rather than extended price rises or price declines.
What Am I Trading In, Exactly?
What you end up trading depends on the market you decide to invest in. There are many different types of markets NOT included on this list, but the ones we’ve mentioned here typically don’t have a minimum investment, so they are open to everyone.
Stock trading involves buying and selling shares in publicly-listed companies. Not sure what that means? A share is just a portion of a company’s total value, which can go up and down in price depending on how much the company is worth at any point in time. When a company gets listed on the stock exchange, its shares are available for investors to buy.
For example, if Wendy’s Wellington Boots Plc’ is listening on the London Stock Exchange at £10 million, with 10 million available shares, each share is worth £1.
A few months later, the UK has its wettest summer on record. Everyone rushes to buy Wendy’s Wellingtons, and investors pile in, driving up the value of Wendy’s Wellington Boots Plc to £15 million! But, it still only has 10 million shares. This means that the share you bought originally for £1 is now worth £1.50. Congratulations, you just made 50p!
Unfortunately, by the time autumn rolls around, the CEO of Wendy’s has quit the company in the midst of a very embarrassing scandal. Investors lose faith in the company, pulling out. Its value tumbles to £6 million. What does that mean? Your share, which originally cost you £1, is now only worth 60p…sorry.
This is an over-simplified example, but hopefully, it gives you an idea of how your shares (or any commodity) might go up or down in value according to supply and demand.
Forex is a market that deals in the buying and selling of foreign currencies. You’ve probably already traded in a physical ‘forex market’ by buying foreign currency when you travel. However, traders who buy and sell Forex do so with the aim of making money. The huge volume of currency being traded globally can make this an extremely volatile market. This means there is a high level of risk (i.e. losing all your investments), but also a potential to earn high profits.
Unlike in ‘Wendy’s Wellington’s example, supply in forex trading is controlled by central banks. For example, if the Bank of England decides to inject cash into the economy to try and boost spending, supply of sterling is increased, and its value falls. Other factors, such as the news (people like to invest in stable economies) and countries’ credit ratings, can affect the value of currencies too. It, therefore, helps to have your finger on the pulse of global affairs if you’re interested in forex trading.
Cryptocurrency trading is similar to Forex, in that traders buy and sell digital currencies with the aim of making a profit. There are some important differences, however. Cryptocurrency is decentralised, which means it is not controlled by a government bank. Rather, there is a network of computers on which the currency is created and stored.
This means that crypto markets may not be as easily affected by political events, which can drive movements in Forex. However, crypto markets are still governed by supply and demand. When new coins are created, lost or destroyed, it alters the currency’s supply. Demand can be driven by how a currency is portrayed in the media, how easy it is to use and access, and setbacks such as security breaches.
Many mainstream trading platforms offer something called ‘CFD trading’ on cryptocurrencies. This allows traders’ leverage’. With leverage, a trader buys a ‘contract’ on an amount of crypto at a fraction of the price of the currency itself. If the currency increases in value, the trader earns the full profit. Likewise, if the currency falls, the trader must pay the full value of the losses.
ETFs are bought and sold on stock markets but are slightly different to shares. ETF stands for Exchange-traded fund. It is a collection of investments that tracks a particular industry or sector and includes a mixture of investment types, such as stocks, bonds and commodities. Compared to traditional mutual funds (which often require a significant investment), the price of ETFs fluctuates much more. However, it allows investors with smaller portfolios a much cheaper way of diversifying their investments than if they were to buy each stock individually.
Nailing a strategy
It is really, really important to carry out thorough research before starting to trade. Fortunately, there are loads of great (and free!) resources online to get you started, from trading bloggers to industry news and even online courses. As you learn more, you’ll be able to hone your strategy. Check out some of the resources below to get started:
- Abnormal Returns: Investor education blog run by Tadas Viskanta, the Director of Investor Education at Ritholtz Wealth Management LLC.
- The Reformed Broker: Wealth Management blog by an NYC-based financial adviser
- Financial Samurai: Thoughts an d insight on everything from pensions to profiting when interest rates are on the rise
- The Manual of Ideas: A well-curated blog of member contributions on intelligent investment and investing strategy.
Free Trading Courses:
- IG Academy: A comprehensive collection of resources for everyone from beginners to seasoned traders
Paid-for Trading Courses:
- eToro Trading School: A comprehensive beginners course
- Day Trading Academy: An intensive course for aspiring day traders
- Bullish Bears: A community-focused site with loads of educational resources aimed at ongoing education,
Sources for Financial News
Check out Investors Business Daily, The Economist, The Financial Times, Reuters and Bloomberg.
Taking Your New Skills for a Drive
Once you’ve brushed up on your knowledge and have a strategy down, it’s time to test it out. Most online platforms come with a built-in practise mode, which allows you to play with fake money until you’ve perfected your strategy.
Online Trading Platforms
If you feel ready to give online trading a spin, you’ll need to choose a platform to set up your accounts and launch your investment from. We’ve lined up the vitals of a few of the UK’s most popular sites in the UK to help you make your decision:
|Broker||Commission (per trade)||Custody Fees (for looking after your funds)||Minimum Investment||Other good bits||Watch out for|
|IG||It depends on how much you traded last month. If you made under 2, it’s £8 per trade on UK markets and £10 on US markets. If you traded more than that, US markets are free and its only £3 per trade in the UK||£24 per financial quarter for portfolios up to £15,000||£0.00||– Heaps of technical tools and charts|
– Active community forums
– Advanced screening tools to find suitable assets
– Offers fully managed portfolios
|– Users report a very slow sign-up process|
|FINECO||£2.95 for stocks, up to £6.95 for some assets (e.g. bonds)||0.25% of your portfolio||£0.00||– Useful filters to help find ideal stocks|
– Free analytical software download
|– A bit more basic than some offerings|
|Hargreaves Lansdown||£11.95||0.45%||£100||– Lots of quality in-house researc|
– Managed portfolio options
– Easy-to-use interface
|– Quite pricey|
– No demo mode
|eToro||0% – but lots of other fees||None||£500||– Etoro ‘trading school’|
– Social feed under stock options lets you see what others are saying
|– Long verification process|
– Advertises no commission, but beware of mandatory withdrawal and currency conversion fees
|Fidelity||£10.00||£10.00||£0.00||– Lots of guidance and useful tools||– More expensive than some competitors|
|Degiro||£1.75 + 0.014% – cheaper on US and EU markets||£0.00||£0.00||– Easy-to-use watchlist function|
– Realtime market data for c. £2-£8 per market
|– Stats and charting redirect you to third-party site|
Hopefully, this guide had helped you learn more about the world of online trading and the possibilities that it could hold. It always pays to remember that your capital is at risk when you make a trade- but if you’re ready for a challenge and can withstand a shortfall, trading could also provide you with extra income and a productive new past-time.