Rookie Investor: Trading Apps 

In 2020 there was a huge surge of interest in DIY investing with trading apps picking up many new customers. These apps can be a bit like a fast car. In the right hands, they can be a great option to get from A to B. They allow you to purchase shares easily, frequently and cheaply. In the wrong hands they can be dangerous - especially if you fall into the world of so-called ‘CFDs’, where the ability to borrow money to buy things means you can lose a lot of money – money you don’t have – very, very quickly. Read on for some road safety tips on how to avoid the crashes.

Overview 

Overall we’re a fan. Trading apps are a great addition to the retail investing world, offering many benefits to their users. But they can bite too so treat with caution.

On the plus side, they are often pretty competitive on fees. They tend to be good on mobile and/or have a strong app. And frankly they can liven up what was traditionally a staid experience. So they can tick all the boxes when it comes to convenience, cost and even pleasure! (easy there…)

On the downside they can gamify things to the extent of encouraging risky behaviours and also promote the trading of individual brand names and shares above a more ‘boring’ balanced portfolio. This means there is a pretty high risk of having all your eggs in just a few baskets – and if these baskets unravel, you get hit.

Like everything else, a gobby few on social media might claim it’s all easy profitable fun, but the reality can be a bit uglier.

So. Be aware of the pluses. But be super honest about the downsides too. We’re not immune to the feeling of backing a stock or crypto and seeing it shoot up in a few weeks. But this isn’t investing, it’s gambling and speculative, so if you want to have a play, set a limit (maybe 10% of your investible money) and also set stop losses. More on this later.

As a side note, some of these guys offer access to spread betting and crypto. As all the disclaimers say, about 80% of those doing spread betting lose money. ‘Nuff said. Such a bad idea. And crypto? It’s anyone’s guess. We don’t think it’s investing but a punt on the future and the sentiment of crowds. Maybe a side bet – but not something we back as a long-term, sensible investment strategy.

As a side note, some of these guys offer access to spread betting and crypto. As all the disclaimers say, about 80% of those doing spread betting lose money. ‘Nuff said. Such a bad idea. And crypto? It’s anyone’s guess. We don’t think it’s investing but a punt on the future and the sentiment of crowds. Maybe a side bet – but not something we back as a long-term, sensible investment strategy.

What are the advantages of Trading Apps over Traditional Platforms? 

Trading apps allow users to execute high volumes of share trades without incurring significant expenses. In fact, Freetrade and Trading 212, two of the most popular trading apps, do not charge users any commission for buying/selling shares. So you can be trigger happy without the drag from charges.

This provides investors who want to deal shares with huge potential saving opportunities. Market leading platforms like Hargreaves Lansdown and AJ Bell charge £11.95 and £9.95 respectively for this privilege, dropping to £8.95 and £4.95 when users have traded 10+ times in the previous month.

It is important to note that both Hargreaves and AJ Bell have significantly lower fund trading fees (free and £1.50) and these fund options are not available on trading apps. However, for those looking to purchase shares in specific companies - these platforms are significantly more expensive than their trading app counterparts.

So it’s worth reading up on the difference between funds and shares. Work out if you are a ‘buy and hold’ kinda person. Or a trader. And pick your platform accordingly.

If you want to play the game, here’s a sneaky bet. You could buy a few ‘ETFS’ (Exchange Traded Funds) via a trading app and hold them in a tax-free ISA account. No trading fees. Very low investment management fees. And access to a diverse basket of shares. The FTSE All-Share, for example.

 

 

 

The Trading Apps 

 

Popular Questions

 

Q: What are ETFs?

A: Exchange Traded Funds are simple cheap ways to buy a collection of shares. Think of them like a playlist on Spotify. Someone else choses and assembles the list, and puts everything into one place. So, if you buy a US ETF, you can access a broad range of US shares, in one investment vehicle, and with one trade. They are bought and sold on a stock exchange so behave like shares. A fantastic way to diversify and avoid having just a handful of single shares. Cheap too.

Q: What are CFDs?

A: A nightmare. Contracts For Difference are contract between a buyer and seller. They basically involve a bet that the share price of something will go up. So say shares in Boring Money cost £1 today. If they go up to £3 at a contracted date in the future, then the difference is £2. Yay, well done you. If they go down to 10p, then the difference is minus 90p. Boo. The nasty bit is that you can make these bets without buying the whole share. So you could pay 10p to make a bet on the current share price of £1 going to £3. And the impact this has is to massively inflate any wins but also to massively inflate any losses. It’s basically playing hard and loose with the stock markets and the odds are super heavily stacked against you.

Q: What are stop losses? 

A: A stop loss is a tool used to limit an investor’s potential loss on a particular stock. The user will set a price for the stop loss and if the price of the stock reduces to that amount, the platform will immediately sell your holdings, to prevent making further losses. The stop loss price will always be below the current value of the stock. 

For example, if someone owns a share that is currently worth £100. They may decide to put in a stop loss at £90. If the value of the share drops by 20%, to £80, the platform will have sold their share as soon as the price touched £90. This reduces the impact of the price drop, as they have lost £10 with the stop loss, instead of £20 without it.  

Share prices can be very volatile, so think carefully before putting in stop losses. Often prices can dip but then recover within a short period of time. With a stop loss, your shares will be sold as soon as the price reaches the stop loss level, which means that you won’t be able to benefit from any recovery unless you re-purchase the share at a lower price.  On the other hand, they can be a brilliant way to remove our silly human greed from decision-making, imposing a razor-sharp discipline on loss-making and protecting you from yourself.

 

Q: What are limit orders? 

A: A buy limit order is an order to purchase stock that will be executed at a limit price, which will be lower than the current price of the stock. For example: If a Tesla share costs $600, Trader X may find this price too expensive. However, if the price were to drop to $500, Trader X would definitely want to buy some shares. Trader X could then put in a limit order at $500, so if the Tesla stock price touches that price, the platform would automatically buy Trader X’s requested amount of Tesla shares. 

A sell limit order works similarly, but in the opposite direction. It is an order to sell stock at a specific price that is higher than the current market price. For example: Trader Y owns 10 shares of Apple which are currently worth $125 each. Trader Y wants to sell these shares but feels that the market prices is too low. The Trader decides to put in a sell limit order of $150, which means that the platform will automatically sell his 10 shares if Apple’s stock price reaches $150. 

All limit orders can be adjusted or cancelled at any time; giving traders the flexibility to change their minds as the market situation evolves. 

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