How To Start Trading

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 aim of potentially making significant gains over multiple trades.

Day trading boomed during the Covid-19 pandemic of 2020, 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, despite the higher risk, by the potential to earn higher returns from trading than from cash deposited in interest-bearing savings accounts.

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

Why has day trading become more popular?

The evolution of web-based services means that trading has become increasingly popular as a way of potentially making money in the past couple of decades, especially 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). Trading platform Freetrade says the average age of its customers is 30. 

What has likely 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 nearly 5 billion views on TikTok, although this is eclipsed by the 18 billion views that have been chalked up 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. Copy trading can be highly speculative and may lead to significant losses.

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, in contrast, 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 are examples of strategies 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.

Would-be investors looking to profit potentially from any of the above techniques also need to beware of the pitfalls. It’s crucial to do your own research and, when evaluating a company or a fund, it’s vital that investors think about the risks as well as the potential rewards.

Without the right mindset, it’s easy to get blinded by the potential for a big 10-times return on an obscure micro-cap stock. But remember that a stock trading at one 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 eToro, Trading 212, and Robinhood, a new entrant to the UK market in March 2024. 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.

Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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 when selling 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 should 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 – or a fifth – 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 aim 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 some of 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 and markets such as commodities and forex. 

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.

Apple share price

It’s a similar story on this side of the Atlantic, according to our analysis of most bought and sold shares by month. Tesla 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 some of 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. Investing, after all, can be unpredictable. If everyone knew which way the markets would be trading tomorrow or next month, beaches would be perpetually crowded.

As a general 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 potentially be a lucrative activity for a minority, longer-term investing tends to be a lower-risk way of potentially making money from the stock market.

Time in the market, not timing the market, is perhaps the most important rule of thumb. The best time to start investing was always 30 years ago. The next best time is today.

Frequently Asked Questions

Can I practise trading?

Yes. Depending on which investment trading platform you choose, several providers offer stock market simulators or similar tools which allow you to practise trades with virtual money.

What time can I start day trading?

Given the presence of different global time zones, Monday to Friday there is usually a market somewhere in the world that is open to trade. That said, would-be traders need to apply a certain amount of discipline to their activities, perhaps by getting to know and specialise in certain markets and sectors rather than adopting a scatter gun approach to their deals.

What is momentum investing?

Momentum investing is an investment strategy that involves buying securities that have demonstrated an upward price trend. It can also cover short-selling securities that have shown a downwards price trend. There are no guarantees with momentum investing which is rooted in a strategy connected to technical trading. In other words, momentum investors are not duly concerned with, say, a company’s operational performance. Just the indicators that suggest there is momentum in a security’s price movement.

What’s the difference between trading and investing?

This tends to be time-dependent. Investors would regard themselves as identifying stocks and other securities which are liable to produce long-term returns. Traders rely more on an ‘in and out’ strategy.

What is a broker?

Stock brokers used to be the intermediaries that would-be investors would contact when they were looking to make, say, a share purchase. With the evolution of online investment and trading platforms, the traditional role of the broker has mainly been supplanted by machine and automation. That said, with some platforms it is still possible to phone through a trade than do so via a computer terminal.