Now that we've covered what trading platforms are and how much you need to get started, let's dive into what your options are.
Trading platforms in the UK include stocks by default. Still, you will also see other assets flying around, from more traditional ones like bonds, commodities, and exchange traded funds to newer players like cryptocurrencies. We tend to navigate towards trading platforms with a wide range of offerings as they allow greater flexibility for branching out and having a diversified portfolio.
Stocks represent a small unit of a company. When you buy a stock, you actually become a part owner of the company. As the company does better, the price of the stock will usually go up. But other things can affect the price too, like what other investors think of the company, its industry, and the economy as a whole.
If the economy is not doing too well, and people think that the company management is not cut out for the task, they might decide to sell their shares. This can ultimately cause the price of the stock to go down.
So, it's important to keep an eye on what's going on with the company and its industry. Almost every stock trading platform in the UK supplements its trading services with market research. Many, like IG or Saxo Markets, include quality commentary on market events and certain companies written by their own financial experts.
If you are a new starter and wish to play around with the stock exchange to learn the ropes, it makes sense to go with a low-cost, intuitive platform like eToro, Freetrade, or Trading 212. All three are among the best stock trading platforms for casual investors. eToro and Trading 212 offer demo retail investor accounts that you can use to learn the ins and outs of the platform, while Freetrade offers a chance to crack into the stock exchange with only £2 using fractional shares (to rehash, fractional shares refer to units of a whole share).
Mutual funds and ETFs
Both mutual funds and ETFs are expertly managed collections, or “baskets” of assets, like stocks, bonds, or commodities. The fund managers handpick and invest in these assets. When you invest in a fund, you don’t actually own the assets, the fund itself does.
When the assets under the fund’s management do well, the value of your share in the fund also increases. It’s a bit different to buy into mutual funds compared to stocks as they are not traded on an exchange. All of them have a minimum investment amount, and it can range from £500 to £5,000 or even £10,000.
Exchange-traded funds (ETFs) are the cheapest, arguably most accessible type of investment fund. They are traded on stock exchanges like stocks, and their price is much lower than mutual funds. They can include assets from a certain industry, like the best automaker companies, or a group of well-performing companies, like the top 100 companies in the UK (FTSE100).
The majority of the best UK trading platforms offer ETFs, but mutual funds are not as common. You will also see that big investment companies have their own funds, like Vanguard or Fidelity. You don’t have to use their platforms to buy their funds, though. You can find them on more affordable options like Freetrade or Fineco Bank.
What is Diversification?
You’ll likely see the word diversification thrown around whenever there’s a talk about investing in funds. It’s just a fancy name for spreading out your investments.
Imagine you are invested in two different stocks, like Tesco and Tesla. You divided your £100 investment in half for both stocks. Tesla just released a car with a bunch of problems, and they had to recall all the cars they had sold. Investors lost confidence in the company and began to sell their shares. This led to Tesla’s price dropping 10% in value.
After the drop, the value of Tesla shares in your portfolio is now £45 (£5 less than the original value of £50). But your Tesco share increased by 3% in value because everybody still loves Tesco. This means that the value of Tesco shares in your portfolio is now £51.50.
So the overall value of your portfolio now stands at £96.50. Your overall loss is £3.5 or 3.5%. If you had invested all your £100 in Tesla stocks, your loss would have been £10.
Now imagine being able to spread your investments like this across dozens or even hundreds of stocks. ETFs and other funds give you just that. This way, you decrease your risk exposure. Meaning that you are not dependent on a single stock to do good, your other investments may make up for what you will lose.
Forex trading is just swapping one currency, like pounds, for another, like euros. You try to make money out of price swings. There are over 180 currencies in the world – this means you’ve got a world of opportunities.
The forex market is also huge, it is the largest financial market (like the stock market or commodities market). International politics and local events affect the currency exchange rates constantly. This means that while you have a lot of exciting opportunities to make money, there’s also a high risk involved because the market is very volatile (prices change rapidly).
Saxo Markets is among the best brokers for forex trading with specialised tools and a low-cost trading fee structure. However, if you are just starting, we consider eToro to be the best forex trading platform for beginners. With straightforward pricing and an easy-to-use platform, you won’t be confused whilst getting up to speed. Plus, you can follow more experienced traders to get some inspiration.
Crypto assets were originally designed as an alternative that may replace cash, but it doesn’t look like it’ll happen soon. As of now, they make great speculative trading opportunities for many people.
Simply put, cryptocurrencies are tokens or coins that help blockchains operate. Every blockchain has its own coin, but some companies also issue their own. You can buy and sell coins on cryptocurrency exchanges and trading platforms that include coins within their product portfolio.
Cryptocurrencies have no intrinsic value as of yet, and while it has been a growing market, it’s still relatively small. Since they have no important use to us yet, speculation and market sentiment (what investors think about the asset) determine their value more than anything. All these combined make cryptocurrencies very volatile, meaning that prices can change rapidly and dramatically.
eToro, IG, Fineco Bank, and Saxo Markets are among the best trading platforms in the UK that allow you to trade cryptocurrencies. They have a pretty good range of coins listed, and trading fees are not steep. If you’d like to use a cryptocurrency exchange instead, Coinbase is an excellent choice to get started.
Commodities are physical goods we consume, like energy, metal, or livestock. Experienced traders usually prefer branching out to commodities because they behave differently than other assets. Gold prices, for example, rise when stock prices decline. So it’s a good way of offsetting your losses when the prices of other assets go down.
Many trading platforms in the UK offer commodity trading, but it’s usually through leveraged products like spread betting or CFDs. Capital.com, eToro, and Saxo Markets have some pretty good collections – but you should be mindful when betting on commodity prices as they can be very volatile.
Alternatively, you can also indirectly invest by buying commodity-producing company stocks or invest in commodity ETFs, which track the prices of one or more commodities. Degiro is one of the best trading platforms for indirectly investing in commodities, you can easily search the types of commodities you’d like to invest in and it has a wide range of offerings.
You have probably seen many trading platforms in the UK offering products like CFDs, spread betting, or options. These are called derivative trading products because they derive their value from underlying assets. See, this is where it gets a bit complicated – let’s break this down.
Derivatives are contracts. When you trade derivatives, you essentially buy and sell contracts. Using these contracts, you can speculate on the price direction of an asset (whether the price will go up or down). These assets can be stocks, bonds, commodities, or currencies. The main difference is that you don’t actually own the asset, but you are just placing a bet on its price movement.
CFDs, spread betting, and options contracts explained
An options contract, unlike CFDs and spread betting, gives you a chance to buy the asset eventually. However, when you buy an options contract, you don’t own the asset straight away.
Imagine that you predict the Apple stock will increase from £120 to £140 in the near future.
If you enter a CFD contract and bet on the price rising, you will pay £120 initially. If the price rises as you thought it would, the broker will pay you the difference when you close your trade. Say that it rose from £120 to £140, and your broker will pay you the £20. But if it drops from £120 to £100, you owe the broker £20.
Spread betting works similarly to CFDs. The main difference is that when you are placing a spread bet, there’s an expiration date. Whereas with CFDs, you can close the trade whenever you want.
An options contract gives you the right, not the obligation, to buy the Apple share at a price you decide. This is called the strike price. Say that you set the strike price at £130. If the Apple stock rises to £140 as you predicted, you can buy the stock for £130 (lower than the actual price) with your options contract. But you don’t have to. So if the stock price doesn’t rise, you can just abandon the contract.
Why Trade Derivatives Instead of Buying the Assets Themselves?
There are certain benefits to using derivative products rather than directly trading assets.
Tax benefits – When you are trading CFDs and spread betting, you don’t have to pay Stamp Duty tax. With spread betting, you don’t have to pay capital gains tax either.
The ability to use pounds for foreign stocks – As we said before, you have to convert to the native currency to buy foreign stocks. You can use your pounds to buy the contracts for foreign stocks.
The use of leverage – You can increase your buying power by borrowing money from your broker.
What is leverage?
Leverage is the money you can borrow from your broker. It essentially increases your buying power. Say that you have £10,000 to trade with, and your broker gives you 5x leverage. This increases your initial investment to £50,000. If you are in a CFD contract, and the price moves 5% in your direction, you make £2,500 instead of £500.
Leverage can magnify your wins but it also magnifies your losses. If the price moved 5% in the other direction, you would lose £2,500 instead of £500.
Every leveraged trade has a margin requirement. It is the minimum amount of funds you need to have in your account to use leverage. At its core, it works like an insurance for the broker.
The best leverage trading platforms in the UK include IG and Capital.com, both at 30x (increases your initial investment 50 times). They also have pretty low margin requirements. For more information, visit our guides on the best CFD brokers, options trading, and spread betting platforms.
Using Leverage Carries High Risk
Using leverage in your trades may seem appealing, but it is also extremely risky. It can rapidly increase your losses and salt away all of your account balance. Between 70% to 80% of retail traders lose money when using leveraged products like CFDs or spread betting.
As you browse through the trading platforms in the UK, you will see some of them offer a number of different account types. The most common ones are individual savings accounts (ISA), self-invested pension plans (SIPPs), and general investment accounts (GIA).
We call ISAs and SIPPs tax wrappers because they have pretty great tax advantages. With both of these retail investor accounts, you can invest in whatever asset you’d like (or whatever your best online trading platform offers). But, you can’t use trade derivatives like CFDs – so they are better suited for your non-leveraged trades.
The difference between ISA, SIPP, and general investment accounts
For ISA accounts, the government sets an annual allowance at the beginning of each tax year (restarts on the 5th of April every year). The amount is currently £20,000. As long as you don’t invest more than £20,000, anything you gain from your investments will be completely tax-free.
SIPPs are a bit different. Most people can contribute as much as £60,000 to their SIPP accounts per year. If you are a basic rate taxpayer (that’s earning under £50,270 per year), the government adds 20% tax relief. This means that for every £80 you contribute, you’ll get a free £20.
If you are a higher-rate taxpayer (earning over £50,270 per year), you still get 20% automatically and get another 20% in your tax returns. So, if you contribute £10,000, the government will still add £2,000, and you can claim an additional £2,000 from HMRC when you do your self-assessment.
A general investment account is the good old, regular brokerage account you’d get from any trading platform available for UK investors. It doesn’t have any tax benefits or anything special. You can, though, trade CFDs and other derivatives as much as you like.
And the good news is, you can have all these three retail investor accounts at once. If you are not looking to use derivatives, we recommend you max out your ISA allowance first for your investments. This way your profits won’t be salted away with taxes.
Once you get up to speed, you may consider automating your trades. Automated trading includes setting up conditional entry and exit positions (opening and closing a trade). This could look like this:
An automated trade example
Let's say you have a trading strategy that involves buying or selling a certain stock when it reaches a certain price. Instead of monitoring the stock price and placing orders manually, you can set up an automated trade to execute these trades for you.
You set up the algorithm to buy a stock when its price reaches a certain level. For example, if the stock price reaches £50, the algorithm will automatically buy the stock or execute a "buy" order.
You can also set up an algorithm to sell stocks when they reach a certain price. For example, if the stock price reaches £55 from £45, the algorithm will automatically sell the stock, or execute a "sell" order, so that you lock that profit of £10.
On the other hand, if the stock price drops to £45, the algorithm can automatically sell the stock to limit your potential loss (in case the price keeps dropping).
You can leave the algorithm running and it will monitor the stock price and execute trades automatically based on the conditions you've set.
While it helps, you don’t have to be a programmer to use algorithmic trading. MetaTrader4 and MetaTrader5 are the most commonly used automation software by the best UK trading platforms. You can set your parameters using these software, and programs called Expert Advisors (EA) will monitor the markets and execute your trades for you. If you are interested, IG and Saxo Markets are among the best algorithmic trading platforms with access to MetaTrader4.
Automation is not always as complicated, though. In fact, it can be quite a relaxing and engaging experience.
What is copy trading?
Copy trading involves copying the trades of a trader of your choosing. Say that James is a very successful trader, he consistently turns a profit and doesn’t like to take many risks. His choices fit with your trading goals. You really like the stocks he chooses, and how he times his orders (when he buys or sells stocks). You’d want to follow in his footsteps, but you can’t just monitor his trades all day.
Enter copy trade – with a copy trading function, you can automatically copy all of James' trades on autopilot. And if he ever takes a downturn, you can just stop.
Copy trading usually comes with a larger focus on social trading.
Social trading platforms include social feeds like forums so that the traders using the platform in the UK can interact with each other. This way, you can detect traders whose style you like and that you’d like to learn more from and use the copy trading function to mirror their trading behaviour. Hands down, eToro is the best copy trading platform available for UK investors. It makes trading a completely interactive experience. You’ll even see that the platform eerily resembles Facebook.
As an enthusiast with a deep understanding of trading platforms and financial instruments, I can confidently navigate through the concepts mentioned in the article. Let me break down the key elements discussed in the text:
Trading Platforms in the UK:
- Trading platforms in the UK facilitate the buying and selling of various assets, including stocks, bonds, commodities, exchange-traded funds (ETFs), cryptocurrencies, and more.
- The article emphasizes the importance of choosing platforms with a diverse range of offerings for a flexible and diversified portfolio.
- Stocks represent ownership in a company, and their prices are influenced by company performance, investor sentiment, industry conditions, and economic factors.
- Stock trading platforms in the UK often provide market research and expert commentary to assist investors in making informed decisions.
Mutual Funds and ETFs:
- Mutual funds and ETFs are curated collections of assets managed by professionals.
- Mutual funds don't allow direct ownership of assets, while ETFs, traded on stock exchanges, offer a cost-effective way to invest in various sectors or groups of companies.
- Diversification involves spreading investments across different assets to reduce risk.
- ETFs and mutual funds are highlighted as tools for achieving diversification by investing in a broad range of stocks or other assets.
- Forex trading involves exchanging one currency for another, with opportunities to profit from currency price fluctuations.
- The forex market is volatile, influenced by international politics and local events.
- Cryptocurrencies are digital assets traded on platforms and exchanges.
- Their value is driven by speculation and market sentiment due to the lack of intrinsic value.
- Commodities are physical goods like energy, metal, or livestock.
- Commodities trading on UK platforms may involve leveraged products like spread betting or CFDs.
Derivative Trading Products:
- Derivatives, such as CFDs, spread betting, and options, derive their value from underlying assets.
- They provide benefits like tax advantages, the ability to use leverage, and trading in foreign stocks using the native currency.
- Individual Savings Accounts (ISAs), Self-Invested Pension Plans (SIPPs), and General Investment Accounts (GIAs) are common retail investor accounts in the UK.
- ISAs and SIPPs offer tax advantages, while GIAs allow trading in derivatives.
- Algorithmic trading involves automated execution of trades based on predefined criteria.
- MetaTrader4 and MetaTrader5 are popular automation software used by UK trading platforms.
- Copy trading allows investors to replicate the trades of successful traders automatically.
- Social trading platforms, like eToro, provide a social feed for interaction among traders.
In conclusion, the article provides a comprehensive overview of trading platforms, diverse investment options, and strategies to enhance the trading experience for investors in the UK.