If you have any preconceived ideas about trading on the stock market, they’re likely taken from The Wolf of Wall Street, or maybe that hypothetical episode of Friends where Phoebe has two heart attacks. Much is being done to make the world of investments accessible to you and I, with much of this drive focused on investment management, mixed funds and robo-investing, all of which can be done with just a basic knowledge and without having to learn about trading individual stocks.
But individual trading is growing in popularity, especially thanks to the ‘StockTok’ phenomenon, where people share (entirely unregulated) trading tips on social media channels, so we need to make sure that there’s a good awareness of what trading is, how it differs from investing in funds, and what the risks are. Below, you’ll find a guide to what it means to trade, the platforms making it possible, and what to be aware of:
How is trading different to investing?
Investing and trading are both, essentially, ways to use the stock market to make a profit – but they are very different in method, risk and intensity, and one mustn’t be confused with the other. The key difference, really is timescale, which impacts on the risk to your money. Investment is a long-term strategy, usually employed over a minimum period of three to five years, and is used to grow your money over time, for long-term goals such as retirement, upsizing your home, or saving for your children’s future.
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You can invest using a few different products across a huge number of platforms, including investment apps and traditional investment companies. You can access investment products either directly, or through a financial advisor, who will also give advice on the products that they think will grow your money most efficiently.
When you invest, you will usually spread your money across several different types of shares, in different companies, to mitigate risk – this is called diversifying. Investors can enhance their profits by compounding their gains, and reinvesting profits in additional stocks.
Trading is a short-term strategy that aims to take advantage of the rising and falling value of specific stocks or other assets (you can trade things like commodities, currencies, cryptoassets and indices) to make money very quickly – usually on a daily, monthly or quarterly basis. This is where you will see those examples of people having made huge amounts of money in a very short space of time. While this is, of course, possible, it does rely on both skill and luck, and you have to pay very close attention. Those traders on the stock market floor aren’t shouting for nothing – there is an urgency to trading because profit relies on buying assets at a low price, and selling when the price spikes.
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The big takeaway from this, which bears repeating, is that there is a huge difference in risk, as well as reward. Traders stand to profit more, but also to lose more, where investing strategies aim to mitigate risk using time and diversification.
What are the different types of trading and trading platforms?
According to Investopedia, there are four main types of traders:
- Position Traders, who hold stocks from months to years.
- Swing Traders, who hold stocks from days to weeks.
- Day Traders, who hold stocks throughout the day, but never overnight.
- Scalp Traders, who hold stocks for seconds to minutes, and never overnight.
The risk and intensity increase as you move down the list, and the final two – Day Trading and Scalp Trading – can be viewed more akin to gambling than to investing. You are gambling on the fact that your stocks will increase in value in the time that you are holding them, and that you’ll be able to sell them for more than you bought them for.
If you want to dip your toe into the world of trading, platforms like eToro and Freetrade have made it more accessible, with a user-friendly interface. Each also has reams and reams of literature about how to use their platforms and different types of trading, that it’s worth reading before you get started.
Considerations to make before you start trading
The potential gains of trading are very tempting, but it’s really important to make sure that you’re not putting your financial wellbeing at risk by embarking on what can sometimes be a risky journey. Here are a few things that you might want to consider before you trade:
Do you have an emergency fund?
You should never trade with money that you might need as a safety net, so ensure that you have enough stashed to cover your bills in case of an emergency, and that your living costs are well and truly covered. Any money that you trade with should be properly ‘spare’.
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How comfortable are you with risk?
If the thought of losing money makes you feel anxious or uncomfortable, trading is not for you. Similarly, if you’ve previously had issues with gambling, trading may trigger similar behaviours, so it’s best to steer clear.
Have you set a trading budget?
Making sure that you set a cap on your trading capital that you feel comfortable with is imperative, as it can be easy to get caught up and lose sight of how much you can afford to trade with.
Are you clued up?
Research your trading platform thoroughly. Ensure that they are legitimate and regulated, that your information is safe and you know exactly what will happen to your money once you begin.
As long as all of these things have crossed your mind, and you’re comfortable with the fact that it might take you a little while to get to grips with the way that things work, you may be ready to start looking into things – just approach with caution.