If you all want to start trading stocks in the UK but still don’t know how to go about it, this article would help you understand everything there is about the investment. Stock trading is considered one of the oldest forms of investment capable of turning average income earners into millionaires.
Table of Contents
- What is Stock Trading?
- How Does Stock Trading Work?
- Types of Stocks Available
- Stock Trading Methods in the UK
- How to Start Stock Trading in the UK
- What You Need to Know Before Trading
- How to Choose a Stock Trading Platform
- Are Stock Trading Platforms Safe?
- Stock Trading Strategies to Use
- Stock Trading Pros & Cons
- Frequently Asked Questions (FAQs)
While it is possible for you to record significant gains within a short period after you start trading on the stock market, there are horrifying stories of traders who have recorded over 99% losses trading.
These stories, have in one way or the other, affected many people from developing interest in trading the asset class. However, having the right knowledge about how to start trading stocks will contribute immensely to your success in the space.
In this article, we will help you get started in trading stocks, with emphasis on how the asset works, the different types of stocks available, the trading strategies to help you record maximum profits, etc.
Before we begin, let’s understand what stock trading is.
What is Stock Trading?
Stock trading involves the buying and selling of companies’ shares to make short or long-term profit. Acquiring a company’s stock gives the holder a level of ownership of the firm.
However, the level of control the shareholder will have on the company will depend on the amount of shares owned. While it is possible to buy physical company stocks, most traders gain exposure to the assets via Contract-for-Difference (CFD) trading accounts.
Through CFDs, traders can capitalise on the constant price fluctuations of different companies’ stocks with the sole purpose of profiting from this price movement.
For instance, you may decide to buy Facebook stock at a particular price and after the price must have gone above your entry-level, you can choose to sell it.
Stock trading is conducted in a regulated environment, which helps bring different traders from all walks of life together to participate in the buying and selling of various companies’ shares.
Although stock trading may sound simple to many, the truth is, it carries a significant amount of risk and is capable of reducing your entire net worth to the barest minimum if it is not conducted in a disciplined manner.
Let’s take a closer look at how stock trading works.
How Does Stock Trading Work?
As long as you’ve attained the legal age of investing, you can buy or sell any publicly traded company stock on a regulated exchange and the process involved is simple. The idea is to make a profit by buying the stock at a lower price and selling higher.
As stated above, both buyers and sellers are brought together under a regulated trading platform, to either purchase or sell a company’s stock. Millions of traders are seeking to take advantage of these assets’ price movements.
After choosing the trading platform, buying the asset is similar to an auction process where you’ll place a bid at a price you believe is lower and convenient for you. The regulated exchange will, in turn, match your order with that of an intended seller, who is seeking to offload the asset at a price he or she is willing to sell.
It is worth noting that the consistent buying and selling of a stock is one of the factors that contribute to its price increase or decrease.
Types of Stocks Available
1. Common Stock
This type of stock is the most popular among investors. As a matter of fact, when people talk about the stock as an asset or a form of investment, they are mostly referring to it.
The common stock enables investors to own a portion of the company, giving holders voting rights to elect the firm’s board members that will oversee the day-to-day decision-making in the firm, as well as partake in the company’s profit-sharing.
The investors’ voting right to elect the company’s board members is dependent on the number of shares owned, as the holder is given one vote per share.
If along the line, the company goes bankrupt, the shareholder will not receive a dime for the stock until the firm’s bondholders, creditors, and preferred stockholders are first paid.
2. Preferred Stock
While Preferred stock also gives holders a portion of a company’s ownership, it does not bestow the same voting rights on the investors as in the case of common stock.
Investors in this type of stock usually get a fixed dividend regardless of the company’s performance, which is contrary to what is tenable with common stock that has variable profits.
3. Growth Stock
The growth stock is a company’s share that is expected to increase beyond its market average.
Dividends are not paid for this type of stock because they are reinvested in order to accelerate its growth in the short term.
People who invest in this type of stock are optimistic that they will earn more money through capital gains when the share is sold in the future.
4. Value Stocks
A valued stock is one that trades below its actual price compared to its core fundamentals, including earnings, dividends, and sales. The stock is undervalued in a bid to lure more investors into purchasing it.
5. Penny Stocks
These types of stocks are associated with a relatively low price, low market capitalisation, and are listed on smaller exchanges. Although some penny stocks trade on bigger exchanges like the New York Stock Exchange (NYSE), others are mostly traded via over-the-counter transactions (OTC). Any stock priced under £5 per share is considered a penny stock.
Stock Trading Methods in the UK
To invest in stocks, you can either buy a physical share of the company or invest in your preferred stock through a Contract For Difference (CFD) account or spread betting.
The major difference is that the latter only allows you to speculate on the price movements of these stocks and does not give you full ownership like buying a physical asset.
How to Start Stock Trading in the UK
So you’ve decided to trade on the stock market, but you still don’t know how to begin. We’ve compiled the following steps to help you get started:
- Choose a Brokerage Platform
There are several regulated stock and CFD brokers in the UK where you can choose to start trading the price movement of these assets. Select a platform that provides services that align with your trading needs.
To select a suitable trading platform, the platform should offer professional customer support, adequate security measures, and a good variety of different company’s stock.
- Pick Your Stock Based on Proper Research
This can sometimes be overbearing for newbies as it requires the trader to spend hours analysing different stocks that have good growth potential. Proper FA and TA need to be carried out for each asset, with emphasis on FA.
There are several news sites that provide constant updates about the stock market, do well to bookmark them on your browser to keep you updated.
After the research, you should be certain whether to buy or sell as the case may be. The research will give you a hint on whether the trade will be in your favour.
- Define Your Trading Budget
Determine the number of funds to use to buy the stock. One pro tip is, never invest more than you can afford to lose. Set up a proper money management plan that will help you allocate your funds in bits to different trades so that should the market go against you, the loss would not be too heavy on you.
- Choose Your Trading Strategy
After deciding on the stock to trade, you should also determine the type of strategy to use for each trade. It is either you use the day trading strategy, scalping, swing, or position trading. We will explain more on this later in this article.
- Determine Your Entry/Exit Points
This gives you an insight into the price level at which you intend to buy and sell the stock. The entry points are mostly determined via a proper TA, which identifies the suitable price level to enter and exit your position.
- Close the Trade/Position
Once your purchase order is filled, monitor the trade and close it when it eventually hits your target. Since you are not available at all times, it is advisable to set a stop loss and place a profit order immediately after your buy order gets filled, to help you mitigate your losses and maximise your gains.
- Evaluate Previous Trades
After closing your trades, take some time to reflect on the things you got right or wrong to help you do better going forward. If it’s possible, always write down what you learned from each trade, that’s one of the ways to help you become a pro in the long term.
What You Need to Know Before Trading
Stock trading can be enticing for newcomers in the UK based on the high number of success stories that have been recorded over the years. Most billionaires may at one point promote stocks over other financial instruments on different occasions.
While this is enough to motivate anyone into wanting to invest in their assets, here are five things you need to know before you start to trade on the stock market:
1. Don’t Invest More Than You Can Lose
One major mistake newbies make is that they always want to throw lots of funds into the market with the hope of reaping bountifully when the value of the asset soars.
What they fail to understand is that nothing is promised in this space and even the best of traders also incur losses.
Since stock trading poses a high risk, it is advisable that you only invest what you can afford to lose. Never invest your life savings into an asset as its price could diminish in a matter of minutes should the company suffer a major financial setback.
2. Conduct Adequate Research
Before investing in a stock, you need to spend a substantial amount of time researching its value propositions and risks of the investment.
Here’s where your FA and TA prowess comes in. If after researching, you’re convinced that the trade would be in your best interest, then proceed with the investment, or else decline from moving on with the plan.
3. Always Verify
As part of your research, do not rely on enticing words made by people about a stock before investing, as this may spell doom. Always verify any information before throwing your weight behind it.
Although several professional traders are in the habit of “buying the rumour and selling the news,” that does not imply you should consider every piece of information as potential news that could pump the value of the stock.
Some traders with a large following could take advantage of that, by taking early positions and spreading fake news in order to get more people to buy, thus causing the value of the stock to spike. The trader may then proceed to dump the earlier purchased stock on unsuspecting traders, causing the price to crash.
4. Set Targets
Your target should be clearly stated before you invest in a stock and once it is met, do well to exit the trade. Don't wait until you’re in the trade before setting targets as you may end up giving back your profit, and sometimes your capital, to the market.
You should have a suitable entry and exit target that you should always rely on no matter the circumstances.
The importance of timing cannot be overemphasised. Once you’re convinced about the growth potential of a company’s stock, proceed immediately and place your order. Since your analysis cannot reveal exactly when the next big move will occur, waiting a little longer could see the market move against you.
How to Choose a Stock Trading Platform
At the moment, there are numerous stock or social trading platforms in existence where you can speculate on the prices of these assets. While this could be a blessing to a large extent, it has somehow created a problem of choice for new traders who are seeking to take advantage of the market.
Your success or failure as a stock trader is largely dependent on what platform you’re using. Based on this, we’ve compiled some things you should look out for to help you select the best and most reliable trading platform.
- Geographical Location and Restriction
It is true that there are tonnes of existing exchanges, one important thing you should consider is your location and whether the platform has any form of restriction for people in that jurisdiction.
Most stock trading platforms usually impose restrictions on certain countries due to regulatory sanctions that hinder the firm from offering its services in that region.
Ensure that before choosing a stock trading platform, your country is among the list of locations the exchange caters to.
This is one of the important things you should take into consideration. Try to find out the level of security that the stock trading platform offers to protect your funds and information from hackers.
The stock market has had horrifying tales of hackers’ activities and you do not want to be a victim in any way. The platform you choose to trade on should deploy all basic and advanced security measures in keeping its clients safe.
Security techniques like the Google two-factor authenticator (2FA) is one measure that prevents anyone who does not have access to your device from gaining access to your account.
- Background Information
You need to enquire about the company’s background information before choosing it to start trading stocks in the UK.
Enquiries about the operators of the platform should be made since you will be trusting them with your funds and information. This will help you know who to hold responsible should anything happen to your funds.
In addition, also inquire whether the platform has an operational licence from a reputable regulatory body, as this may give you the assurance that if anything goes wrong, the platform operators will be mandated to reimburse its clients.
- Past Customer Reviews
Since this article is focussed on intending stock traders who are seeking to choose a reliable trading platform, you should find out what existing users of the exchange are saying about it.
If the reviews are positive, then you’ve found yourself a good platform where you can start trading stocks. However, if the negative comments exceed the positive ones, then you don’t need to be told that the platform cannot be trusted.
- Customer Service
The stock market functions only at specific times during the week and as such you need to get a trading platform that has a professional support team that works throughout this time.
This is important as it gives you the assurance that your complaints and enquiries will be quickly attended to without any form of delay. Trading stocks can be tasking and using an exchange with poor customer service will most likely compound your woes.
Are Stock Trading Platforms Safe?
With stories of hackers taking advantage of exchange’s loopholes to syphon millions of pounds and information in the past, these trading platforms have integrated some of the best security measures to prevent future occurrences.
While this has been the case of late, you should be aware that nothing in this world is 100% safe as hackers are always on the lookout to identify and exploit every security loophole.
It does not matter what trading platform you are using to trade but being an online stock trader also comes with the mandate of making adequate efforts to keep your account safe.
As stated above, most of these trading platforms have integrated some of the best security measures to keep you safe, and it is up to you to enable them on your account.
Advanced safety protocols like the Google 2FA are made available by the trading company while the implementation is carried out by the account owner.
Stock Trading Strategies to Use
These techniques will help you achieve profitable returns within a specific period of time.
Before opting for any of the trading methods, it is expected that you’ve determined the stock to trade, your entry and exit level, and a proper funds management plan.
Regardless of the method you opt for, you should conduct adequate Fundamental Analysis (FA) and Technical Analysis (TA) for any stock you want to trade.
Fundamental Analysis is mostly considered as the most influential factor that affects the assets’ value either negatively or positively.
While a good Technical Analysis (TA) has made several stock investors huge gains, everything could change in a flash when an FA about the assets surfaces.
That said, let’s examine the different types of trading methods available:
- Day Trading
This trading method is adopted by traders who do not intend to hold positions for more than a day. As the name implies, the trader buys and sells stocks within the same day.
All positions are entered and closed within the day. Traders in this category are mostly professionals or market makers who have substantial knowledge or analysis about the next market movement.
Here, the trader executes multiple trades daily in a bid to exploit the bid-ask spreads, which are sometimes wider than normal due to temporary imbalance in supply and demand.
A scalper’s main focus is to capitalise on smaller moves that occur frequently.
- Swing Trading
A swing trader gets involved in the act when a trend breaks. The trading method requires the trader to buy or sell when price volatility sets in.
Contrary to the two other trading methods, swing trades are usually held for more than one day. Before buying or selling an asset, the scalp trader conducts proper TA and FA to determine the time that is suitable for the trade.
- Position Trading
The position trading method focusses on long-term price movement of a stock in a bid to get maximum profit. For this trading strategy, the trades are held for more than a week, months, or even years.
Unlike other trading methods that require traders to constantly monitor the market and price movement of the asset, position trading is not concerned with minor price fluctuation.
Stock Trading Pros & Cons
Before dipping your toes into the waters of stock trading, it is necessary that you consider the pros and cons of the act, to ensure that there are things you can cope with.
Without further ado, let’s go through the pros and cons of stock trading.
- Lucrative returns and means of livelihood.
- It gives traders something to look forward to.
- Trading is relatively easy.
- Profits from trading gives you a chance to stay ahead of inflation.
- Highly risky.
- Not available on weekends like cryptocurrencies.
Frequently Asked Questions (FAQs)
Can I Trade Stocks With £50 Pounds?
Yes, you can. However, it can only be possible when a unit of the company’s share price is below £50. While choosing a broker, ensure that there are no extra fees that could see the price increase above your £50 capital.
Is there a Difference Between Trading and Investing?
The major difference between the terms is the frequency in buying and selling of shares. While trading involves buying and selling more frequently, which could take days to weeks, investing is focussed on holding the purchased stock long-term with the hope of gaining a higher profit within this period.
What Stock Can I Trade in the UK?
The list of stocks you can trade in the UK is endless. However, not all stocks are made available in the region due to regulatory restrictions. Sometimes, a trading platform may choose not to list a stock for reasons best known to them.
Regardless, you should research whether the stock you’re interested in is permitted to trade by the UK laws.
Can I Trade Stocks on Weekends?
With the advancement in technology, many traders believe that since the cryptocurrency market trades 24/7, the stock market, which has been in existence for ages, should do the same.
Unfortunately, the market does not work that way, as traders are not allowed to buy or sell on weekends. It is also worth mentioning that the market opens from 9.30 a.m. to 4 p.m. Eastern time (ET).
How Many Stocks Should I Trade at a Time?
Ensure you’re not in more than five trades at a time as this act does not yield good results. Keeping an eye on these stocks in your portfolio can be difficult and as such could hinder your ability to take profit or mitigate losses at the appropriate time.
Here you have it, everything you need to know about trading stocks in the UK. While the investment has proven to be beneficial to lots of traders in the past, it is advisable that you tread carefully as trading stocks pose a significant level of risks and as such could lead to major losses.
Only use reliable trading platforms to trade stocks and you can choose one by following the process stated earlier in this article.