How To Start Trading – Forbes Advisor UK

Trading refers to the buying and selling of assets, often shares in a company, over a relatively short period of time. Traders hope to make a profit on each trade with the potential to make significant gains over multiple trades.

Day trading boomed during the pandemic, with nearly two million people in the UK dipping their toes into trading for the first time, according to investment company GraniteShares. The majority of these traders were motivated by the potential to earn higher returns from trading than from cash deposited in interest-bearing savings accounts.

We’re going to take a closer look at how to start and get into trading, including how to research trading opportunities, minimise fees and open a trading account. 

Investing in the stock market is inherently risky, and doing so puts your capital at risk. You may not get some or even all of your money back.

Why has day trading become more popular?

Day trading has become increasingly popular as a way of making money, particularly with younger generations. 

According to Investor’s Business Daily, Millennials (aged between 26 to 42) made 56 million trades in the last quarter of 2022, nearly 1.5 times the number of trades made by Gen X (aged 42 to 57). The average age of trading platform Freetrade’s customers is just 30. 

What has prompted the increase in day trading by private investors? Well, day trading first hit the headlines with the share trading frenzy of so-called ‘meme stocks’ during the pandemic. 

Private investors took on short-selling hedge funds in companies such as Gamestop in the US. 

Co-ordinating their efforts on social trading platforms such as Robinhood, they drove up the share price of Gamestop and triggered substantial losses for hedge funds.

This was supported by the rise of financial influencers, known as ‘finfluencers’, who use social media platforms such as TikTok, Instagram and YouTube to post about investing. The hashtag #FinTok currently has over 3 billion views on TikTok, although this is eclipsed by the 12 billion views for #investing.

Would-be day traders also have the option of ‘copy trading’ on platforms such as eToro. This allows less experienced traders to mirror the portfolios of other traders, with trades placed automatically. 

What’s the difference between trading and investing?

The key difference between trading and investing is the length of time that shares are held. Day traders usually buy and sell shares within a short period, often less than 24 hours, whereas investing is usually based on a ‘buy and hold’ strategy, with shares being held for several years.

Traders hope to make a small profit on each trade that can accumulate into a significant gain over a number of trades. They use share price volatility with the aim of buying ‘low’ and selling ‘high’.

Investors typically look to make a larger profit from a smaller number of trades. They invest in companies with long-term growth potential which should lead to an increase in share price or asset value over time.

What strategies are used for trading?

Trading requires extensive research in order to form a view on short-term price movements, often using technical or fundamental analysis.

Technical analysis looks at price movements through the use of charts and technical indicators to identify patterns. Fundamental analysis looks at company-specific and wider market factors to assess whether shares are fairly valued.

Trading strategies may include:

• Trend (or momentum) trading: using technical analysis to buy or sell assets, depending on the direction of the trend. 
• Swing trading: using technical analysis such as ‘support’ and ‘resistance’ to take advantage of short-term ‘up and down’ price movements (rather than longer-term trends). 
• News trading: trading before or immediately after news releases which may result in price movements.
• Scalping: placing a large number of very short-term trades, aiming to ‘scalp’ a small profit on each trade.

Alex Campbell, head of communications at Freetrade, says: “It’s important to remember to do your own research. When you’re evaluating a company or a fund, think about the risks as well as the rewards.

“It’s easy to get blinded by the potential for a big 10-times return on an obscure microcap stock, but remember that a stock trading at 1 pence can still lose 99% of its value (and fast).”

What accounts can be used for trading?

The first step is to open an account with a trading platform. To help with this, we’ve produced a guide to our pick of the best platforms for day traders.

While many traders use a general trading account, it’s also possible to trade shares in tax-efficient wrappers such as Individual Savings Accounts (ISAs) or Self-Invested Personal Pensions (SIPPs). Capital gains tax is not charged on any profits from trading in these accounts.

Most accounts can be opened online in around 15 minutes, and customers will be asked to provide personal details such as their name, address and national insurance number.

What fees are charged?

It’s worth taking the time to research fees as these can make a serious dent in profits due to the number of trades. 

There are four main types of fees (and costs):

• Trading fees: some platforms charge no fees for buying or selling shares, including Freetrade, eToro and Trading 212. Other platforms may charge a flat fee, often around £5-£10 per trade.
• Platform fees: this is an annual fee for holding shares on a platform. Many of the zero-commission platforms charge no platform fee, however, other platforms charge either a percentage-based fee (typically around 0.25%) or a flat fee (often around £5-10 per month). Some platforms cap the platform fee for shares at a maximum amount per month.
• Foreign currency conversion fee: charged when buying non-UK shares, typically around 0.5% to 1.0% of the value of the transaction.
• Stamp duty: charged at 0.5% of the value of the transaction when buying UK shares.

Although not technically a fee, providers also make money on the buy-sell spread on shares. For example, a share might have a buy-sell spread of 110-113 pence. This means that traders would pay 113 pence to buy a share and receive 110 pence to sell a share. 

Some providers offer more competitive buy-sell spreads than others, and less traded shares, such as FTSE Small Cap companies, typically have wider spreads than FTSE 100 companies. Traders will usually focus on shares with a small spread as a high spread can make a dent in their profits.

How are trades placed?

Once a trading account is opened, and funds have been added, trades can be made. Traders search for the shares they want to buy, either using the company name or the ‘ticker symbol’ (a three or four letter abbreviation for the company).

The trader will be provided with a live quote for their transaction, which they have around 15-20 seconds to accept, or let it lapse and generate a new quote.

Trading hours are 8 am to 4.30 pm for the London Stock Exchange and 9.30 am to 4 pm for the New York Stock Exchange. 

Some platforms allow the purchase of fractional shares, which are a proportion of one share, for example, 0.2 of a share. This can be useful if the company share price is very high and/or where the value of the trade is less than the price of one share.

How can traders manage their risk?

One of the key tools for managing trading risk is the use of limit orders and stop losses:

• A limit order is an order to buy or sell shares at, or better than, a set price. So if a trader set a buy limit order at 90 pence, it would only be executed if the price was 90 pence or lower. 
• Similarly a ‘take profit’ or sell limit order is only executed at that price or higher. It can be a good way of obtaining a good price for a trade without having to monitor the share price in real time.
• A ‘stop loss’ can also be a useful tool to limit downside exposure from trading. This is an order to sell shares if the price falls to, or below, a level set by the trader. For example, a trader may set a fixed stop loss at 10% below the share price which limits their maximum loss to 10%. This can also be set on a rolling basis to adjust as the share price changes.

Although diversification is more common in investment portfolios, it can also reduce risk for traders. Spreading trades across different companies, sectors and countries can decrease the overall risk of losses from an individual company or sector underperforming.

In addition, many of the trading platforms offer free demo accounts which allow traders to practise trading with virtual, rather than real, money.

Traders should also treat trading ‘tips’ with caution, particularly in community forums. Some traders seek to artificially drive up a company’s share price in order to sell their shares, known as ‘pumping and dumping’.

What are the best markets for day trading?

In addition to shares, traders can trade indices, ETFs and bonds, as well as foreign exchange, cryptocurrency and commodities. One of the most popular markets for day trading is foreign exchange (forex) as it is highly liquid and can be traded 24 hours a day, five days a week. 

However, novice traders may find researching price movements of individual company shares more straightforward than complex assets such as commodities and forex. 

As well as trading in the asset directly, traders can also trade indirectly through the use of derivatives such as contracts for difference (CFDs) and spread betting. These are higher-risk instruments with the potential to make significant losses.

What shares are traders buying and selling?

According to Investor’s Business Daily, day traders favour large-cap stocks in the US. The top five shares traded by Millennials last year were (in order): Tesla, Apple, Amazon, Microsoft and Nvidia.

It’s a similar story on this side of the Atlantic, according to our analysis of most bought and sold shares by month. Teslas has topped the table of the most traded stocks over the last year, with Amazon and Apple also featuring regularly.

However, investors have also seen potential opportunities from trading in UK large-caps such as banking giant Lloyds, mining company Glencore and aerospace and defence firm Rolls-Royce.

What are the risks of day trading?

It can be difficult to make money from day trading, particularly for novice traders without real-time access to live trading feeds. 

Predicting short-term price movements requires a high level of skill and, even then, professional traders can find themselves on the wrong side of a deal.

Freetrade’s Dr Campbell comments: “As with life, investing is unpredictable. If we knew the way that markets would trade tomorrow or next week, we would be relaxing on a distant beach.”

As a rule of thumb, day traders follow the ‘1% rule’ which limits each trade to no more than 1% of the total value of their portfolio. This caps their exposure to losses, in addition to the use of limit orders and stop losses (explained above).

Day Trade Review reports that only the top 1% of day traders are able to beat the market, and 85% of day traders give up within their first three years of trading, while active traders in the US typically underperform the broader stock market by 6.5% a year. 

While day trading can be a lucrative activity for some, longer-term investing may be a lower-risk way of making money from the stock market.

Dr Campbell adds: “Time in the market, not timing the market, is perhaps the most important rule of thumb. The best time to start investing was always thirty years ago. The next best time is today.”