How to start trading on stocks and shares in the UK

Why start trading?

Trading on shares has the potential to grow your money at a greater rate than in a savings account. Since the advent of the first stock exchange, the market has returned an average 10% per year, while a cash savings account has average 2% interest. Between 2010 and 2020, Goldman Sachs noted that the US stock market’s S&P 500 increased its average annual return to 13.6%. Successful traders can achieve even more than that — and if you make the right call, you can even bet successfully on prices falling with stock shorting strategies​.

Naturally, with any form of speculation there’s an element of risk — the wrong trade could lose you a lot of money — but there are some ways to mitigate that risk. And ultimately, the more experienced you become at reading the market, the better you’re likely to get at spotting a stock on the up.

So, before you begin, the first thing to understand is what the stock market is and how it works.

What is a stock market?

A stock market or stock exchange is a financial market in which company stocks are bought and sold. The prices of shares listed on these exchanges are not set by individual companies or the exchange, but by the organic forces of supply and demand. As an equity becomes more desirable and more traders buy it, its price will naturally rise.

Stock markets exist in major cities around the world; see here for stock market trading hours​. The main ones include:

• New York Stock Exchange (NYSE)

• National Association of Securities Dealers Automated Quotations System (Nasdaq)

• London Stock Exchange (LSE)

• Euronext (ENX)

• Japanese Exchange Group (JPX)

How does it work?

The stock market works by bringing together buyers and sellers on one platform and enabling them to transfer ownership of stocks and shares. Prices of individual stocks are determined by supply and demand. In stocks and shares trading, traders aim to buy stocks at a low price with the hope that the share price will rise in the future so they can cash out on the price increases. However, they stand to lose money if the stock price falls.

How do stocks come to market?

A company initially lists shares for sale when it wants to raise significant capital to fund its continued growth. In making shares of the company available to outside investors, it transitions from a private (for example, privately owned) company to a public company.

The shares are traditionally put up for sale through a process known as an initial public offering (IPO)​, although some companies can use a special purpose acquisition company (SPAC)​ that helps to ‘piggyback’ private companies onto the stock market. However, once the shares become available, they are then bought and sold on the stock market as supply and demand dictates.

What is share trading?

Share trading is the process of opening long and short positions (buying and selling) of company stock using derivative products with the aim of watching and reacting to the market over a relatively short time to gain profitable stock returns. This isn’t the same as share dealing (otherwise known as investing), which involves buying a stock and holding it for long-term gain, possibly over many years.

As a trader, you agree to exchange the difference in price (positive or negative) between when you open and close your position and the more the price moves, the more you gain or lose, depending on which way you trade.

How to trade stocks

1. Research and pick your stocks.

   Read up on news, analysis, and market insights from prominent market analysts, as well as company's fundamentals using financial ratios such as P/E and EPS.

2. Choose your platform

   You can choose between MetaTrader4, MetaTrader5, TradingView and the CMC Platform. Compare trading platforms.

3. Determine the direction of your trade.

   Based on your research, decide if you wish to go long and ‘buy’ the stock or go short and 'sell'. This is a matter of speculating whether the price of the stock will rise or fall based on your research. In the case of short selling, beware of a short squeeze in the stock market​.

4. Choose a trading strategy.

   Once you know which share you are trading on and the direction of that trade, you can determine your entry and exit points based on your trading plan. Make sure you don’t forget to implement your risk management guidelines as part of your trading plan.

5. Determine your position size, then 'buy' or 'sell' the stock.

   If the trade aligns with your trading plan, open an order ticket to speculate on the asset’s price action. Consider placing stop-loss and take-profit orders to manage the risk of your position size.

6. Close your trade.

   Keep an eye on your trade and close it as stated in your trading plan. That is, if it has not already been closed by the risk-management conditions​ that you previously set.

7. Evaluate and track.

   Think about how you performed in your trade, analyse what went well and what could have gone better. Note down your performance as per your trading plan to help you keep track of your results.

Open a live account to deposit funds and gain access to the live markets, or if you’re feeling apprehensive about the risks of stock trading, you can practise first with our risk-free demo account with $10,000 of virtual funds.

What moves market prices?

The price of a stock is ultimately determined by supply and demand. But what drives this? How might you tell if a stock is about to go up or down? As you learn how to trade stocks, here are a few factors that can help you decide which way to bet on an individual stock.

Earnings reports

Major stock exchanges require businesses to release information on their financial performance. If a company exceeds profit and/or revenue expectations, the share price is likely to increase. But if a company misses its targets or underperforms against its forecast, the price will likely go down.

Economics

Macroeconomic forces such as interest rates, inflation and GDP (gross domestic product) can cause shifts in the supply and demand of all industries and therefore all have a knock-on effect on share prices. Traders may keep an eye on the news for events and announcements that may impact the economy as a whole or individual sectors.

Politics

Elections, trade wars, law changes, strikes and other politically motivated events can cause major disruptions and changes in markets. For example, if legislation is about to loosen around a certain industry, it could improve profitability in companies in that sector, and therefore their share prices. Conversely, a trade war might drive a stock price down. If a company is working in an industry that is closely related to political agendas, an event such as a trade war can cause a stock to decrease in price.

What are the different types of equities I can trade?

Analysts and market commentators often split stocks into different categories, dependent on the type of company, value or what they offer, including the following.

• Blue-chip stocks: These are the top-performing stocks in a particular industry and often act as a benchmark for their respective industry. Examples of blue-chip stocks include Shell, Visa and Procter & Gamble.

• Growth stocks: Companies suspected to grow faster than its competitors. These firms tend to have a sharp focus on innovation, and the stocks tend to do well in a confidence-fuelled bull market, but they are also risky as their ultimate performance sometimes doesn’t live up to the hype. Examples include Tesla, Netflix and Amazon.

• Value stocks: These trade for a cheaper price than predicted by the company’s financial performance. Value stocks tend to be venerable companies with slow but steady, consistent growth, such as Johnson & Johnson, JP Morgan Chase and Berkshire Hathaway.

• Penny stocks: Cheap shares trading at less than $5 in the US (£1 in the UK). They are highly risky, tempting buyers with an illusion of potential for exponential growth. This can pay off – many multi-billion companies once traded for such a low price – but not all are legitimate, and the offer of such cheap stock can leave traders vulnerable to scams. UK penny stocks​ include Hammerson, Ryanair and Rolls-Royce.

• Dividend stocks: As the name suggests, this offers a high dividend yield to shareholders, either in the form of further shares or cash. By definition, dividend stocks tend to be more attractive to long-term investors than traders. Examples of the UK’s high-dividend stocks​ include Imperial Brands, M&G and British American Tobacco.

• Index: This is a selection of chosen stocks that are grouped together with their average price, giving a representative view of individual sectors or the market as a whole. The world’s leading indices​ include the S&P 500, FTSE 100 and the Nikkei 225.

• Exchange-traded funds (ETFs): This is not one stock but a basket of equities that tracks a specific index, so all the stocks in it might, for instance, be renewable energy stocks, or tech stocks. These can be traded like shares and many traders prefer ETFs for their instant diversification spread over a number of companies.

Pricing is indicative. Past performance is not a reliable indicator of future results.

Example of share trading

If you think the price of a particular stock will rise, you can ‘buy’ or go long. However, if you sell too early, you risk losing potential gains. Wait too long and the price might fall, even below what you paid for it. If you think the price will go down, you can 'sell' or go short, which is when you borrow shares from a broker, at a defined interest rate, and then sell them. Then, if the price goes down, you can buy them back at that lower price, making a profit.

As an example of derivative share trading during a five-day week, say a trader 'buys' the green stock in the chart at its lowest point of $7 on Monday and then sees it rise to $23. The stock then starts to fall, and the trader decides to exit at $23. Similarly, the trader shorts the red stock, borrowing it to sell at $26 and then sees its value fall to $8.

However, although the trader buys the blue stock at a low price of $6 and cashes out at $14, the trader exits too soon because the stock then soars to $30, which would have meant a substantially larger profit. The trader makes a costlier judgment with the yellow stock, buying it at $20 believing it will go up. The stock plummets, leaving the trader with a choice of whether to wait for it to rebound or lose money by bailing before it drops any further. The trader ultimately sells for $10, making a 10 loss – but had they waited longer, they could have lost even more money.

Managing your risk

Share trading, like all speculation, carries risk. Even though, with us, you are learning how to speculate on shares rather than invest, you are still exposed to the same dangers — stock prices going down, a company suddenly going out of business, or the entire market crashing, such as in the financial crisis of 2008 when the FTSE 100 nearly halved in value in just a few weeks, or in March 2020 when the Covid-19 pandemic wiped billions of dollars off share prices in a couple of days. You can manage this risk, however, through diversification across multiple companies and sectors, to prevent putting all your traded eggs in one basket. Certain types of stock tend also to carry less risk than others – blue-chips are statistically more likely to be reliable, but calamity can happen to any company at any time. Read our risk-management guide​ for advice and tips before placing a trade.

Does it cost to trade?

Yes, and the main fees applicable include the following:

See our trading fees​ in further detail.

In order to avoid extra costs as much as possible, many traders decide to use ETFs or our exclusive share baskets, which come with zero commission fees and lower holding costs than individual shares (other fees may apply). These can also help to diversify your portfolio while spreading risk across multiple assets using one single position, so these may be beneficial to traders opening multiple positions throughout a single trading day.