Equity Trading UK Guide 2022
Put simply, equity trading is the process of buying and selling shares. Much like any other investment stream, the idea is to make a profit from rising and falling stock prices.
In the case of equity trading, most investors open and close positions on a short-term basis. This means that you will be looking to make smaller margins but on a regular basis.
In this guide, we explore the basics about equity trading in the UK. On top of explaining how to approach equity trading as a first-timer, we also cover strategies, supported markets, risks, and suitable online brokers.
What is Equity Trading?
Equities, stocks, and shares are three terms that are used interchangeably in the online investment arena. As such, equity trading simply refers to the process of buying and selling publicly-listed companies.
The overarching concept is to profit from the rise and fall of stock prices. For example, an equity trader in the UK might purchase £500 worth of HSBC stocks because they think the price is likely to increase in the coming weeks. Similarly, an equity trader might think that the value of British American Tobacco stocks is overvalued.
As such, they’ll short-sell the shares in anticipation of a reduction in price. Crucially, the most appealing aspect of trading equities in the UK is that you have the option of going long or short. Put simply, this means that you can profit when the value of a stock goes up, as well as down.
This is made possible by the evolution of CFD trading platforms. As we cover in more detail shortly, CFDs are financial instruments that track the value of equities in real-time. As the investor does not own the underlying asset, this means that you can trade CFD equities at the click of a button, and in a super cost-effective manner.
Let’s look at a quick example of what an equity trade might look like in practice.
- You open an account with an online trading platform
- You deposit £1,000
- At 257p per share, you think that the value of BP stock is likely to go up in the next few days
- As such, you place a buy order worth £500
- A few days later, the value of BP stock is now 5% higher
- You are happy with your profit, so you exit the position by placing a sell order
- On a stake of £500, your equity trade resulted in a profit of £25
You will, however, also need to factor in some potential trading fees – which we explore in more detail later.
Cash Equity Trading
Cash equity trading is a term used to describe large financial institutions that buy and sell stocks on behalf of their clients. This operates much the same as the equity trading process that we discussed above. That is to say, the financial institution is tasked with predicting whether the value of a stock will go up or down.
If the prediction is correct, the institution makes money for the respective client – which can be anything from an individual investor to a mutual fund. In turn, the firm behind the cash equity trading service will take a commission.
Ways of Trading Equity
There are several ways of trading equity in the UK. The specific investment stream that you opt for will depend on several factors – such as whether you want to trade on a short-term basis or investment in your chosen company for a number of years.
Below we explore what options you have when trading on equity from the comfort of your home.
Most investors in the UK will simply opt to purchase the underlying equity in the traditional sense. In other words, you will be using an online stock broker that offers your chosen stock. Then, you will need to determine how many shares you wish to buy.
This long-term strategy will typically see investors hold on to the equities for several years. Along the way, you might collect dividend payments – which you can then reinvest into other investment ventures.
Crucially, as you will be ‘buying’ equities as opposed to ‘trading’ them, you will own the underlying stocks outright. If using a commission-free share dealing platform like eToro for this purpose, you can hold on to the stocks for as long as you wish without needing to worry about ongoing fees.
When it comes to realising your potential profits, this can be achieved by selling your equities back to the broker. You can do this at the click of a button, and the cash proceeds will then be placed into your brokerage account balance.
If you are looking to ‘trade’ equities, this means that you will be engaging in a short-term strategy. This is because seasoned equity traders in the UK will often only keep a position open for a number of hours or days. In turn, the trader will look to target super-low profit margins – which might sit in the region of 1-2% per trade.
Although these profit margins might not appear overly lucrative, it is important to remember that full-time equity traders are very active.
That is to say, it would not be uncommon for an equity trade to place dozens of buy and sell positions throughout the trading week. If the trader has a consistent knack for predicting which way the markets are likely to go, these small margins can very quickly add up.
With that said, it is imperative for equity traders to use an online platform that offers competitive fees. After all, it would be counter-productive to make gains of 1-2%, only to have your profits eaten away at by expensive commissions. As such, the vast bulk of UK equity traders will make use of CFDs.
Example of a CFD Equity Trade
As we briefly noted earlier, CFDs allow you to trade equities without taking ownership of the stock. Instead, the CFD instrument will simply ‘track’ the real-time stock price of the respective company.
- For example, if Easyjet shares are valued at 650p on the London Stock Exchange when the markets open, the CFD instrument will also be priced at 650p.
- Similarly, if Easyjet shares finish the trading day at 670p, as will the CFD instrument.
As direct ownership does not exist, you can often trade equity CFDs without paying any commission. Furthermore, equity CFDs also give you the option of going long or short. This gives you the opportunity to profit from both rising and falling prices.
If you’re still confused as to how equity trading works when utilising CFD instruments, let’s look a basic example.
- Royal Mail shares are priced at 170p each on the London Stock Exchange
- At this price, you think that the shares are overvalued
- As such, you head over to your chosen CFD platform and place a £1,000 sell order
- A few hours later, Royal Mail shares are priced 3% lower on the London Stock Exchange
- This price is mirrored like-for-like on your CFD instrument
- You decide to cash in your gains by placing a buy order
- On a stake of £1,000 – you made a profit of £30
As you can see from the above, when Royal Mail shares went down by 3% on the London Stock Exchange, as did the respective CFDs. This is a great example of how you can trade equities in the UK without needing to purchase the underlying stocks.
Equity Options Trading
Equity options, more commonly referred to as stock options, offer a more sophisticated approach to trading. For those unaware, options allow you to access your chosen market by paying a small ‘premium’ – which is typically in the region of 5-10% of the contract value.
Each options contract will usually consist of 100 stocks. Instead of placing buy and sell order to outline your projected price movement, you will need to choose from calls or puts.
Unlike futures, options give you the ‘right’ to purchase or sell the stock on or before the contract expires, but not the obligation. This means that an unsuccessful prediction will result only in you losing your premium, and nothing more.
Trading on equity in the UK through options contracts can be difficult to grasp at first glance, so let’s look at a quick example.
- You think that the value of British American Tobacco shares will increase in the coming weeks or months
- Your chosen online broker offers a 3-month options contract with a strike price of £27 per share
- As you think the price will surpass £27 before the options expire, you purchase a call options contract
- The contract consists of 100 shares and comes with a premium of £1.35
- This means that you are required to fork-out £135 to access the market
- A few days before the equity options expire, British American Tobacco shares are priced at £31
- This is £4 higher (£31-£27) than the contract price, so you cash in your profits by exercising your right to purchase the equities at the agreed price
- You have 100 shares in total, so at £4 each you make a total profit of £400
As you can see from the above example, you were able to gain exposure to 100 British American Tobacco shares without needing to invest the full amount. Instead, you paid a premium of £1.35 per share, which in this example, amounts to 5% of the strike price value.
We should, however, note that you would have lost your premium had the shares not surpassed the strike price of £27 before the contracts expired.
Read More: Learn the ins and outs of how UK options trading works in our comprehensive guide.
An additional option that is worth considering in your quest to trade equities is that of spread betting. In a nutshell, spread betting operates much the same as CFD trading, insofar that you can trade the rise and fall of equity prices without taking ownership.
The key difference is that spread betting price movements operate on ‘points’, as opposed to pounds and pence. Crucially, once you get your head around how spread betting works, any profits that you make will not be liable for UK capital gains tax. This is because spread betting is defined as gambling, which in the UK is tax-free.
Why People Do Equity Trading in the UK
Still not sure whether equity trading is right for you and your long-term investing goals? Below we have outlined some of the main benefits of trading equities in the UK.
Access Dozens of UK and International Equity Markets
In a time not so long ago, UK retail clients were limited to domestic companies found on the London Stock Exchange and AIM. However, fast forward to 2020 and it is now possible to trade equities from dozens of international markets. In fact, the likes of eToro, a popular equity trading platform with UK newbies, hosts 17 stock exchanges.
This includes everything from the New York Stock Exchange, NASDAQ, Toronto Stock Exchange, and the Hong Kong Stock Exchange. You can also access equities from less liquid markets such as those found in Sweden, Spain, and France.
UK Equity Trading Platforms Designed for All Skill Levels
There is no requirement to have an abundance of knowledge in the financial markets to be able to trade equities online. On the contrary, there are heaps of brokers that are tailored specifically to newbie traders.
For example, the process of opening an account and depositing funds will take just minutes – and buying, selling, or trading equities can be initiated at the click of a button. You can now do this online or through trading apps. Either way, the equity markets have since opened up to the average Joe Bloggs.
Trading Fees and Huge Account Minimums are Becoming a Thing of the Past
One of the main barriers to entry for newbie investors was that of trading fees and account minimums. Regarding the latter, equity brokers of old-age would charge a higher flat-fee to access the markets. This was highly beneficial for large-scale investors – but not for those wish to trade small volumes.
For example, the £11.95 fee charged by Hargreaves Lansdown might not sound like a lot in practice. But, if you only wish to invest £100 – this works out at an astronomical commission of 10%. As such, this makes it unviable to trade equities, especially if you are looking to engage in a short-term strategy that targets small margins.
The good news is that new-age platforms like eToro and Plus500 allow you to trade equities without paying a single pence in commission. Furthermore, and perhaps most importantly, huge account minimums are also becoming a thing of the past. For example, you can often get started with an equity trading account with a deposit of just £100-£200.
Trade Equities With a Margin of Just 20%
Most online trading platforms in the UK allow you to buy and sell equities on margin. For those unaware, this means that you can access your chosen marketplace without needing to contribute the full amount. As per ESMA regulations, UK traders can apply leverage of up to 1:5 when trading equities – meaning that you only need 20% of your desired stake size.
- Let’s suppose that you wish to trade 50 shares of AstraZeneca shares at £80 per stock
- Ordinarily, this would require an outlay of £4,000
- However, by applying leverage of 1:5, you would only need to stump up £800
In simple terms, this allows you to target much larger profits than your account balance would typically permit.
Equity Trading Strategies
All seasoned equity traders in the UK will have a number of strategies that they rely on. In doing so, this ensures that they give themselves the chance of making consistent gains. As a newbie, it is important for you to find an equity trading strategy that meets your goals.
With this in mind, below we discuss some strategies that you might want to consider exploring.
Buy and Hold
If you are a complete novice in the world of equity trading, you might want to initially stick with a simple ‘buy and hold’ strategy. In simple terms, this means that you will be buying equities in the traditional sense and subsequently hold on to them for several months or years.
Crucially, this allows you to avoid the ups and downs of short-term pricing trends. Instead, you are more concerned with the long-term prospects of your chosen company.
A prime example of this is the S&P 500 Index. Launched in 1927, the index tracks the 500 largest companies listed in the US. Think along the lines of Amazon, Apple, Facebook, IBM, Microsoft, Disney, and Ford Motors. As you can see from the graph below, the S&P 500 Index has gone through many ups and downs over the past 90+ years. However, over the course of time, the index has grown by over 1,200% since its inception.
Additionally, if the respective firm pays dividends, a buy and hold strategy suggests reinvesting the funds into additional equities. This will allow you to grow your money faster through compound interest.
Once you begin to get comfortable with how the equity arena works, you might want to consider a swing trading strategy. This is a short-term strategy that typically sees the trader keep hold of a position from just a couple of days, up to 2-3 months.
The idea with swing trading is that you will be looking to follow rising and falling trends. For example, if IBM stocks enjoy an upward swing for 3-4 weeks, an experience swing trader will look to hold a buy position for the duration of this trend.
When it appears likely that the trend is over, the swing trader will exit their position and look to catch the reversal by entering a sell position.
The most experienced equity investors will often utilise a day trading strategy. As the name implies, the trader will open and close positions throughout the trading day. In fact, a seasoned day trader might hold on to their position for just a few minutes.
This is with the view of making ultra-small, but super-regular, gains. For example, the equity day trader might place dozens of buy and sell orders per day. As long as they have more successful trades than losing ones, they will likely finish the day in profit.
With that being said, day trading is best reserved for those with an understanding of technical analysis. That is to say, in order to determine which way equity is likely to move in the short-run, you need to be able to read pricing charts. This can take many months or years to master.
Equity Trading Platforms in 2022
So now that we have provided heaps of information on how to buy and sell equities in the UK, we now need to discuss trading platforms. After all, if you wish to trade equities online, you will need to find a reliable stock brokers that meets your investing goals.
There are many metrics that you need to look out for before taking the plunge – such as fees, commissions, tradable equities, regulation, and customer support. With this in mind, below you will find a selection of some popular equity trading platforms currently serving the UK market.
eToro is an FCA-regulated trading platform that offers share dealing and equity trading services. You can buy, sell, and trade over 1,700+ stocks from 17 UK and international markets. All equities at the platform can be traded commission-free, alongside competitive spreads. This is also the case for its share dealing services, meaning that you can deploy a long-term buy and hold strategy without needing to worry about ongoing costs.
eToro also offers leverage facilities, which is limited at 1:5 when trading on equity - as per ESMA regulations. The trading platform itself is can be good for newbies, and it takes just minutes to get set up with an account. Upon proving some personal information, you can instantly deposit funds with a UK debit/credit card or e-wallet. If you are a complete novice, you might be interested in the eToro Copy Trading feature.
This allows you to choose an experienced equity trader and then mirror their buy and sell orders like-for-like. This is great for passive investing and super-useful if you have no experience in the financial markets. eToro requires a minimum deposit of just $200, which is about £160. You can get the ball rolling online or via the eToro mobile app. Finally, your funds are protected by the FSCS up to the first £85,000.75% of retail investor accounts lose money when trading CFDs with this provider. Sponsored ad
If you're keen to go the CFD route when trading equities, you might want to consider Plus500. This FCA-regulated platform offers thousand of financial instruments - including a fully-fledged stock trading arena. This covers heaps of UK and international marketplaces, so you can diversify with ease.
You will not pay a single penny in trading commissions at Plus500 and spreads are also on the low side. There is a minimum deposit policy of just £100, which you can fund with a debit/credit card, bank account, or Paypal. No deposit or withdrawal fees apply on any payment method.
Leverage facilities are also available, which again, is limited to 1:5 on equity CFDs. Much like eToro, Plus500 offers a mobile trading app that is compatible with iOS and Android devices. Outside of equities, you can also trade CFDs in the form of indices, bonds, commodities, cryptocurrencies, and more.80.5% of retail investor accounts lose money when trading CFDs with this provider. Sponsored ad
IG is the only UK equity trading platform on our list that charges a commission. Although this isn't ideal, you will have access to one of the largest trading suites in the online space. For example, if you're looking to engage in a traditional buy and hold strategy, the platform hosts over 10,000 shares. This covers dozens of the UK and international markets.
You will pay a flat fee of £8 to access traditional equities at IG. This goes down to just £3 when you place three or more orders in a 30-day period. If you are more interested in trading equity CFDs, IG offers 17,000+ markets. This is suitable for those of you that want to apply leverage or gain access to short-selling facilities.
In terms of commission, this will vary depending on the market. UK equity CFDs, for example, cost 0.1% with a £10 minimum. We should also note that spread betting facilities are offered at IG, which paves the way for tax-free capital gains. You will need to deposit at least £250 at IG, which you can do with a debit/credit card or UK bank account.There is no guarantee you will make money with this provider. Sponsored ad
AvaTrade is a popular online broker that has a strict 0% commission policy. This means that you can trade equities and in a super cost-effective ecosystem. Spreads are also very tight at AvaTrade, and all deposits and withdrawals are fee-free. You will have access to several marketplace, including the FTSE, NASDAQ, and NYSE.
Leverage facilities of up to 1:5 are available on equity CFDs. You can also trade equity options at AvaTrade, which is great for placing more sophisticated positions. The platform allows you to trade through its website or via a native mobile. Additionally, support for MT4 is also offered. This is ideal if you are looking to deploy an automated trading robot.
Although AvaTrade isn't regulated by the FCA, it holds tier-one licenses in heaps jurisdictions. This includes Ireland, Japan, Canada, and South Africa. As such, your funds are safe at all times. Finally, AvaTrade requires a minimum deposit of just £100 - which you can meet with a debit/credit card or bank transfer.There is no guarantee you will make money with this provider. Sponsored ad
Equity Trading Fees
Here’s an overview of what fees you need to consider with the UK equity trading platforms listed above.
Equity Broker Commission Deposit Fees Minimum Deposit eToro 0% if buying and selling, variable spread for CFDs 0.5% currency conversion $200 Plus500 Variable spread Free £100 IG £0 – £10 if buying and selling, variable spread for CFDs Free (0.5%-1% on credit cards) £250 Hargreaves £5.95 – £11.95 Free £100
Fees and commissions can change at any time, so make sure you check this with your chosen broker regularly.
Equity Trading Tips
Once you have chosen an equity trading platform that meets your needs, you can then proceed to open an account and make a deposit. However, we would suggest reviewing the following tips before taking the plunge!
Tip 1: Consider Copy Trading
As we briefly noted earlier, Copy Trading is a feature offered by eToro that allows you to select an expert equity investor, and then mirror their portfolio and ongoing trades. This is something that you might want to consider if you have virtually no idea how to perform technical or fundamental analysis.
Instead, you simply need to meet a $200 minimum investment and the respective copy trader will take care of the rest. You can exit your position at any time, and even adjust individual orders to ensure the trader meets your investing goals.
Tip 2: Equity Trading Signals
An additional option for the equity trading newbies out there is to consider a signal service. In a similar nature to forex signals, your chosen provider will send you ‘suggestions’. That is to say, you will receive a signal in real-time that tells you what equity to buy or sell, and at what entry price.
The equity trading signal will also provide you with suggested stop-loss and take-profit order prices. Not only does this ensure that you can trade equities in a risk-averse manner, but once the orders are placed there is nothing more to do. This is because the position will be closed automatically when your stop-loss or take-profit order is triggered.
Tip 3: Learn Technical Analysis
While some of you might be happy to rely on third-party guidance, seasoned equity traders prefer to take full control over their investment decisions. In order to do this, they will have a firm grasp of technical analysis. This is the skilful process of reading, evaluating, and interpreting pricing charts.
The idea here is to look at historical pricing trends, and how these trends might influence the short-term price action of the equity in question. Chart analysis is only possible when making use of technical indicators like the RSI, MACD, and Bollinger Bands. There are over a hundred such indicates at your disposal.
Tip 4: Take an Equity Trading Course
To ensure you don’t go into the equity trading arena blindly, it might be worth taking an online course. There are many such as courses available in the online domain. Depending on how much time you have to spare, you might consider a flexible course that allows you to dip in and out at your leisure.
Some equity trading courses are delivered in real-time, meaning that you will need to engage as and when the provider schedules a class. Either way, an online course is an ultimate tool when generating that knowledge needed to make consistent profits.
Tip 5: Trade Equities via a Demo Account
All of the equity trading platforms that we have discussed on this page allow you to open a demo account. As the name implies, this allows you to trade equities with demo funds. In other words, you will have access to the very same trading platform as found on a real-money brokerage account, albeit, you won’t be risking a single penny.
This is a great way to get to grips with equity trading prices, strategies, and risk management. You can typically make use of a broker’s demo account facility for as long as you wish. Then, once you are ready to start trading equities with pounds and pence, you can upgrade to a real-money account at the click of a button.
Equity Trading Pros and Cons
- Some trading platforms allow you to buy and sell equities commission-free
- Choose from traditional equities, CFDs, options, or spread betting
- Get started with a minimum deposit of just £20
- Access to thousands of equities across heaps of the UK and international markets
- Ability to profit from both rising and falling markets
- UK investors can trade equity CFDs with leverage of up to 1:5
- Most newbie equity traders lose money
- Learning how to read charts can take many months or years
How to Start Equity Trading
Ready to start trading right now? If so, follow the step-by-step instructions outlined below to start trading equities in a matter of minutes.
Step 1: Open an Equity Trading Account
Visit the broker website to begin the account opening process.
You need to provide the FCA broker with some personal and contact information. You’ll also need to provide your National Insurance Number, and then confirm your email address and mobile number. Be sure to remember your chosen username and password, as you will need this to access your account each time you log in.
You will also be asked to upload a copy of your passport or driver’s license. The verification process also requires a copy of a recently issued bank account statement or utility bill. This ensures that eToro remains compliant with the FCA.
Step 2: Deposit Funds
If you are planning to trade equities with real money, you will now need to make a deposit. If not, you can get started with the eToro demo account facility, which comes pre-loaded with $100,000 in paper funds.
Supported payment methods at eToro include:
- Debit card
- Credit card
- Bank Transfer
As noted earlier, you’ll need to deposit at least $200. Take note, all GBP deposits come with a 0.5% currency conversion fee. This then gives you access to all 17 UK and international markets without needing to worry about exchange rates, not least because your eToro account is denominated in US dollars.
Step 3: Place an Equity Trade
Once your account has been funded, you can start trading equities. If you know which equity you wish to trade, simply enter the name of the company into the search box. As you can see from the below, we are looking to trade Royal Mail.
Once you click on the result that loads up, hit the ‘Trade’ button.
You now need to select from a buy or sell order, which you will find at the top of the pop-up box. This tells the broker which way you think the markets will move. You then need to enter your stake in US dollars and select your leverage multiple – if applicable.
In our example, we are placing a $500 buy order on Royal Mail equities with leverage of 5x. You can also set up stop-loss and take-profit orders to mitigate your risks and ensure you lock in any potential profits.
Finally, check the order box to make sure everything looks right before confirming the trade.
If you’ve read our guide on equity trading from start to finish, you should now be armed with the required knowledge to get your investment journey off on the right foot. We have discussed the many strategies and risks that you need to to consider to trade equities in the right manner and provided an overview of some popular platforms and brokers operating in this space.
What is equity derivatives trading?Financial derivatives are complex trading instruments that typically consist of either options or futures. In the case of equity derivatives, you will be trading the future price of stocks and shares in a more sophisticated manner.
What is the difference between equities and stocks?Nothing! The terms equities, stocks, and shares are all used interchangeably in the online trading scene.
How much do you need to trade equities online?Minimum deposits will vary depending on which equity trading platform you sign up with. In most cases, you'll need at least £100-£200 to get started.
Can you trade equities with leverage in the UK?Yes, all UK traders can apply leverage of 1:5 when buying and selling equities. These are the limits imposed by European-body ESMA.
What equities can you trade in the UK?Popular equity trading platforms give you access to thousands of stocks. This should include equities from the UK, US, Canada, Japan, Australia, and more.
How do you short equities?The easiest way to short equities is to use an FCA-regulated broker that offers CFD. It's then just a case of placing a sell order on the stock that you wish to short.
Can you trade equities on a mobile?Yes, th popular equity trading platforms in the UK also offer a fully-fledged mobile app. This is usually available on iOS and Android devices.
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