Best Trading Platforms in the UK

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Trading is the buying and selling of shares in publicly listed companies. It is also called share dealing or stock trading.

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A share is a unit of ownership in a public company. When you buy a share, you own a small unit of a public company.

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For example, if you buy a share in Apple Inc., you will become a part-owner of Apple. If Apple performs well, you will benefit from its success. If it does not, you may lose some money.

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You may also come across the word stock or equity. In most situations, stocks, equities and shares refer to the same thing. Stocks could also mean all your shares in one or more companies.

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Companies issue shares to raise money to fund their activities. Individuals and institutions trade shares to benefit from the successes of companies they believe in.

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Why Trade Stocks and Shares?

When you trade stocks, you may benefit from capital gains, receive dividends, beat inflation, take advantage of compound interest to grow your investments and vote at shareholder meetings.

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How Does the Stock Market Work?

A stock market is a marketplace where buyers and sellers come together to trade publicly listed company stocks on stock exchanges such as the London Stock Exchange (LSE), the New York Stock Exchange (NYSE), the National Association of Securities Dealers Automated Quotations (NASDAQ), and the Shanghai Stock Exchange (SSE). The NYSE and Nasdaq are the two largest stock exchanges in the world based on the total market capitalisation of the companies listed on each exchange.

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To trade stocks in the UK, you need to open a stock trading account with a trading platform or stockbroker. The best stockbrokers in the UK will allow you to hold your investments in a tax wrapper, such as an Individual Savings Account (ISA), General Investment Account (GIA) or Self-Invested Personal Pension (SIPP).

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Types of Stock

There are two main types of stock that companies can issue to raise capital: common stock and preferred stock. A third type of stock also exists, which is a type of common stock called dual-class stock. See below:

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1. Common Stock: Common stock represents ownership in a company, and holders of common stock have the right to vote on company matters and receive dividends. 

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2. Preferred Stock: Preferred stock does not typically carry voting rights, but holders of preferred stocks have a higher claim on assets and earnings than common stockholders. Preferred stockholders also usually have priority to receive dividends over common stockholders.

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3. Dual-Class Stock: Dual-class stock is a type of common stock that gives certain shareholders, often company founders or executives, more voting power than other common shareholders. This structure allows these select shareholders to maintain control of the company while still raising capital through the sale of common stock. You may have noticed some companies with Class A and Class B shares. These kinds of companies have a dual-class structure. Examples of companies with dual-class stock include Alphabet’s Google, Meta, and Ford Motor Company.

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Stock Market Indices

A stock market index is simply a list of stocks in any given market. It is used as a benchmark to measure stock market performance.

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Examples of stock market indices include:

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1. S&P 500: The S&P 500 index lists the 500 largest publicly traded companies in the US, and it is considered a benchmark for the overall performance of the US stock market.
   
   
2. Dow Jones Industrial Average (DJIA): The Dow Jones Industrial Average (DJIA) or Dow 30 index tracks the performance of 30 large publicly traded companies in the US, primarily blue-chip companies considered leaders in their industries. It is one of the oldest and most widely followed indices in the world.
   
   
3. FTSE 100: The FTSE 100 is a UK index which includes the 100 most highly capitalised companies listed on the London Stock Exchange. The FTSE 100 is seen as a barometer of the UK economy and is often used as a benchmark for UK stock market performance.

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Market Capitalisation and Sectors

Market capitalisation, often referred to as “market cap,” is a way to measure the size of a company based on the total value of its outstanding shares of stock. It is calculated by multiplying the number of outstanding shares by the current market price of each share.

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When it comes to stock trading, companies are often classified based on their market capitalisation. Small-cap stocks refer to companies with a market cap of less than $2 billion. Mid-cap stocks have a market cap between $2 billion and $10 billion, and large-cap stocks have a market cap of more than $10 billion.

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Investing in small-cap stocks can be riskier than investing in mid- or large-cap stocks but can also lead to greater potential returns. Mid-cap stocks tend to have more stability and a moderate level of risk, while large-cap stocks are generally considered less risky but may have lower potential returns.

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When trading stocks, you will notice that there is a standard classification of industries and sectors. The Global Industry Classification Standard (GICS) is a system used to classify companies based on their economic characteristics and business operations. The GICS system includes 11 sectors:

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1. Energy
2. Materials
3. Industrials
4. Consumer Discretionary
5. Consumer Staples
6. Health Care
7. Financials
8. Information Technology
9. Communication Services
10. Utilities
11. Real Estate

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Traders make decisions about what companies to invest in based on many factors, including market capitalisation, industry sectors, and geographical location.

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How Much Money Can I Make in the Stock Market?

The amount of money you can make in the stock market depends entirely on your choices.

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Using the S&P 500 as a benchmark for the stock market’s overall performance, we can see that it enjoyed significant growth in the ten years leading to 2020.

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In 2010, the S&P 500 had a closing value of 1,115.10. By the end of 2020, the index had grown to 3,756.07, an increase of 238% over the decade.

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The stock market experienced a steady rise in the early part of the decade, with the S&P 500 reaching new all-time highs in 2013 and 2014.

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However, the market experienced a significant downturn in late 2015 and early 2016, as concerns over a global economic slowdown and the impact of falling oil prices weighed on investor sentiment.

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The market then rebounded in 2016 and continued to grow steadily until 2020, reaching new all-time highs in August 2020, driven by hope in the COVID-19 vaccine and the US stimulus package. However, the market faced a sharp downturn as the pandemic continued to impact the economy, and uncertainty about the outcome of the US Presidential Election in 2020 increased.

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Please keep in mind that past performance is not a reliable indicator of future performance.

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There are two ways to trade stocks in the UK. You can either trade stocks directly (called direct investment) or use leverage (called margin or leveraged trading).

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1. Direct Investment

Direct investment involves buying stocks or bonds directly from a stockbroker or as part of a mutual fund.

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You can buy individual company shares directly through a stockbroker. Investing in stocks in this way means that you are taking direct ownership of a company’s shares, making you eligible to vote at shareholder meetings and receive dividend payments. Investing in individual stocks and shares is one of the most common ways to invest in the stock market.

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The first opportunity you will have to invest in shares is when the shares are created and offered to the public for the first time. This is called an Initial Public Offering (IPO) or ‘Going Public.’ Companies go public to raise money to fund their activities.‍

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Once shares are created, they can be bought or sold on the stock exchange. This is called the secondary market because it comes after the IPO. The price of shares at IPO is typically determined by the underwriter of the IPO, usually a large bank. After the IPO, the share price is determined by changes in supply and demand.

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You can participate in IPOs or join the secondary market via an online stock trading platform or stockbroker. The best platforms in the UK will allow you to invest in stocks via the secondary market with as little or as much as you feel comfortable with. Most platforms will accept an initial investment of about £25, while others might allow you to start trading with £1. Trading platforms or stockbrokers that give you direct access to an IPO might require a higher initial deposit. Stockbrokers offer three types of services: execution-only, advisory and discretionary.

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Another way to invest directly in stocks and shares is through mutual funds. A fund is a diverse basket of shares, bonds or other assets representing a country, industry, index or theme. Examples of funds include index funds, active funds and exchange-traded funds (ETFs). Funds save you the trouble of buying shares in multiple companies or worrying about building a diversified portfolio. They are also safer and cheaper than buying individual stocks since you share the risks and costs with other investors. Most people, including experienced investors, use funds when investing.

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2. Margin Trading

Margin trading is the use of borrowed money to buy stocks, forex, commodities, indices and other markets. It is also called leveraged trading. When trading on margin, the trading platform or stockbroker will loan you the total value of the trade, requiring only a small deposit as collateral. This deposit is called a margin.

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Because of the loan given to you by the broker, your profits can be magnified when trading on margin, as you can trade much larger amounts than you would with your own money. However, in the same way that your profits can be magnified, your losses can also be magnified, and you could lose all you invested.

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Leveraged products allow you to take a long or short position in a financial market. If you believe the price of an asset will go up, you buy (or “go long”). Similarly, if you think the price of an asset will go down, you open a sell position (or “go short”).

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There are several ways to trade on margin in the UK, including via contracts for difference (CFDs), forex, options, spread bets, and futures.

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1. Contract for Difference: A Contract for Difference, or CFD, is a financial contract that allows you to speculate on the movement of the price of an asset. It is a bet on whether an asset’s price will increase or decrease. A CFD is not an asset on its own, but you can purchase it based on a large number of other assets such as shares, ETFs, indices, forex, options, or even commodities like gold and oil. CFD trading is the buying and selling of contracts for difference (CFDs).
   
   
2. Foreign Exchange: Foreign Exchange (Forex or FX) Trading involves the speculative buying and selling of national currencies with the goal of making a profit. When you trade forex, you do not actually receive the foreign currency in your bank account. Instead, you participate in a contract that specifies that if the currency you purchase increases in value, you take the profit, and in the same way, if it drops in value, you accept the loss. People and institutions use forex to hedge currency and interest rate risks, speculate on geopolitical events, diversify portfolios or make a quick financial gain.
   
   
3. Options: An Option is a contract that gives the holder the right but not the obligation to buy or sell an asset in the future. There are many different types of options, and investors will buy them for a wide variety of reasons. Some use them as an insurance policy to protect against price movement on assets they already hold, and others use them as an investment in and of themselves. Options trading is the process of buying and selling various types of options.
   
   
4. Spread Bet: A Spread Bet is a derivative product that you can use to speculate on financial markets such as shares, forex, or indices. When trading with spread bets, you do not take ownership of the underlying asset but instead, place a bet on whether you think the price will rise or fall.
   
   
5. Futures: Futures are financial contracts that enable two parties to agree on a price for an asset in the present to be exchanged at a future date. Futures give the buyer the obligation to buy the underlying market and the seller the obligation to sell at or before the contract’s expiry. Futures trading is the act of buying and selling futures.

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To trade stocks in the UK, you’ll need to:

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1. Create an account with a broker, such as eToro or Interactive Investor. The best way to buy stocks in the UK is to purchase them online from a stockbroker or trading platform, such as eToro or Interactive Investor. Creating an online account with a stockbroker is a straightforward process. It usually involves signing up via a web portal and providing personal information, like your name, email, and home address. You should research various brokers and compare their fees, trading software, and customer support before investing.
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2. Verify your identity and fund your account using a debit card or via bank transfer. After selecting a suitable broker, you’ll need to verify your identity and fund your account. This is also fairly straightforward. You may have to submit a valid ID, such as your passport, driving licence, or National Insurance number, for verification. You may also have to deposit some money, which could be in the local currency, GBP or a foreign currency, such as USD. If the broker accepts only foreign currencies, they will provide a suitable means to convert your GBP to the required currency, usually for a fee, called an FX fee. Take some time to understand the broker’s deposit, withdrawal, and fee policies before proceeding.
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3. Complete a W-8BEN form for tax purposes if you plan to buy US shares. As a UK investor, you’ll need to complete a W-8BEN form, which allows you to claim a reduced rate of withholding tax on any US-sourced income, such as dividends from Apple or Microsoft shares. It is the broker’s responsibility to provide you with this form, so you need not worry too much about it.
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4. Choose a tax wrapper, such as an ISA or SIPP. A tax wrapper reduces the taxes you pay on the gains from your savings and investments. Examples of tax wrappers in the UK are individual savings accounts (ISAs) and pensions. If you do not want to use a tax wrapper, perhaps because you’ve already used up your ISA allowance for the tax year, you can choose to invest in a general investment account (GIA). With the GIA, you are still entitled to some tax benefits, such as the Capital Gains tax-free allowance (see next section).
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5. Choose your market. There are several markets to trade on, including shares, ETFs, bonds, indices, forex, commodities, options, thematic, and more. You can trade on one market or as many as you want. Before choosing your market, you’ll need to decide whether you want to invest directly (where you buy real stocks and shares) or trade on margin (where you buy products like forex, commodities, and options).
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6. Research stocks, ETFs, and other instruments. Before buying any stock, it is important to carry out thorough research. You’d want to consider factors such as market capitalisation, earnings reports, liquidity, technology and innovation, team, company performance and competition. Most people start with the biggest and most popular companies in the world, as they are usually the safest and most reliable. Such companies could include the likes of Apple, Google, Microsoft, Tesla, Meta (Facebook), and Amazon. If you would rather not pick out individual stocks, it might be sensible to trade ETFs.
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7. Place your first “buy” or “sell” order depending on what direction you think the market will go. If you think the price of a stock will go up, you can open a buy position, called “going long”. Similarly, if you believe the price of a stock will go down, you can open a sell position, called “going short”. Shorting a stock is usually a leveraged (or margin) trade.
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8. Take necessary steps to manage your risk. Even the most successful traders experience losses, making risk management an essential aspect of stock trading. Techniques to limit potential losses include setting stop-loss orders that automatically close a position once a certain loss level is reached, limiting the percentage of your account balance risked on a single trade, and diversifying your trades across different currency pairs.
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9. Monitor your trades and close your position. Trading differs from long-term investing in an index fund or ready-made portfolio. You need to constantly monitor your trades and apply relevant risk management strategies to help limit your losses. When you are happy with your profits, close your position to limit losses and avoid fees such as overnight fees or stop loss premiums.

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Stock trading platforms charge several fees for using their services. The main ones are the annual platform fee, dealing fee, foreign exchange fee, transfer out fee, and inactivity fee.

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1. Platform Fee: The platform fee, also known as a custody fee, is charged by the stock trading app to provide a platform for you to buy and sell shares. It can be a flat fee or a percentage-based fee.
   
   
2. Dealing Fee: The dealing fee, also known as a trading fee or commission, is the fee for buying and selling shares or other investments on the trading app. Discounts are usually available for regular investors. Additionally, some of the best trading platforms in the UK offer commission-free share dealing, which means you do not have to pay a dealing fee when you trade.
   
   
3. Foreign Exchange (FX) Fee: The FX fee, also called a currency conversion fee, is the fee for buying and selling overseas investments denominated in a foreign currency, such as US shares. It is usually charged as a percentage of your trade value, typically below 1%.
   
   
4. Stamp Duty: When you purchase UK shares electronically, you will pay a 0.5% Stamp Duty Reserve Tax (SDRT). If you purchase UK shares using a stock transfer form, you will pay Stamp Duty if the transaction is over £1,000. Stamp Duty on Irish registered stocks is 1%. You do not pay Stamp Duty on AIM stocks or Exchange-Traded Funds (ETFs).
   
   
5. Spread: The spread is typically applied to leveraged trades and represents the difference between the market price and the buy or sell price of a leveraged product, such as a CFD. For example, if you took a long position in a given CFD trading at a wholesale price of £1, the CFD trading platform may charge you £1.01. The difference of 0.01 is the spread. The same applies to the reverse transaction. If you took a short position in the CFD, the platform might charge you slightly below the market price to cover the spread.
   
   
6. Overnight Fee: An overnight fee in margin trading is a daily interest fee charged by a CFD or Spread Bet broker if you hold a position overnight. The fee varies according to the value and direction of your position and is deducted from your available balance.
   
   
7. Transfer-Out Fee: ‍The transfer-out fee, also known as an exit fee, is the fee you pay for moving your investments from one stockbroker or trading app to another. Not all brokers charge an exit fee, but those that do typically charge per fund or holding.
   
   
8. Inactivity Fee: Most trading apps do not charge this, but those that do usually charge you for making less than a certain number of trades within a specified period.
   
   
9. Other Fees: Many brokers and trading apps charge additional fees for features such as stop losses, order limits or take profit orders. Other trading costs might include the cost of the trading software if you use a third-party software and the subscription fees for stock research websites.

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The following are the taxes on stocks and shares in the UK:

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1. Tax When You Buy UK Shares: Stamp Duty Reserve Tax (SDRT)

When you buy UK shares electronically, you will pay a 0.5% Stamp Duty Reserve Tax (SDRT) to the government.

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If you purchase UK shares using a stock transfer form, you will pay Stamp Duty if the transaction is over £1,000.

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Stamp Duty on Irish registered stocks is 1%.

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You do not pay Stamp Duty on AIM stocks or Exchange-Traded Funds (ETFs).

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2. Tax When You Sell All Shares: Capital Gains Tax (CGT)

When you sell shares or other investments, irrespective of the country where the shares are registered or the currency the shares are denominated in, you may have to pay Capital Gains Tax if you make a profit.

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‍You may have to pay tax on the following:

• Shares that are not in an ISA or PEP.
• Units in a unit trust.
• Certain bonds (not including premium bonds and qualifying corporate bonds).

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You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance.

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This tax year, the Capital Gains tax-free allowance is £3,000 (£1,500 for trusts). This means you will not have to pay tax on the first £3,000 profit you make from selling your stocks and shares unless you have already used up your allowance elsewhere, for example, on the profit from the sale of cryptocurrencies.

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Additionally, the first £500 you receive in dividend payments is tax-free. Visit GOV.UK for more information on the tax on dividends and the dividend allowance.

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You may also be able to reduce your tax bill by deducting losses or claiming reliefs - this depends on the asset. Another way to limit your tax bill is by trading certain kinds of leveraged products. Please speak to your tax adviser for more information. Also, visit GOV.UK for more on Capital Gains Tax allowances.

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Here are the best platforms for short-selling stocks in the UK:

1. XTB - Trade stock and ETF CFDs from 0% commission
2. eToro - Trade stock and ETF CFDs from 0.15% market spread
3. Pepperstone - Trade stock and ETF CFDs from 0.10% commission
4. CMC Markets - Trade stock and ETF CFDs from 1 point market spread
5. Saxo - Trade stock and ETF CFDs from 0.10% commission

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The best trading platforms for beginners in the UK are Freetrade, eToro, InvestEngine, and Interactive Investor. All four platforms are easy to use, offer a wide range of trading instruments, and are available to download on iOS and Android devices.

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eToro, Freetrade, and InvestEngine offer commission-free trading on some investment products like US stocks and ETFs. Commission-free trading means you pay no trading fee when you buy and sell investments. This can be particularly advantageous for beginners with little money to invest.

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These platforms also offer fractional trading, which allows you to buy and sell bits and pieces of a stock or ETF. With fractional trading, you can invest in expensive stocks like Tesla ($TSLA), which typically costs over £150, with as little as £2 because you are buying a fraction of the stock instead of the whole. All platforms also offer a slick and easy-to-use mobile experience available on Android and iOS devices. eToro, InvestEngine, and Interactive Investor are also available on the web for those who prefer to trade on their computers.

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Interactive Investor is the second-largest investment platform in the UK. It also has the second-widest range of investments in the industry. These features can benefit beginners who want to learn to trade but do not want to be limited to mobile app-only interfaces or a small number of trading instruments.

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Finally, both eToro and Interactive Investor provide a demo account with virtual funds, which can be helpful for beginners who are not yet confident enough to trade with real money.

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The best share dealing accounts in the UK are AJ Bell, Interactive Investor, and Hargreaves Lansdown. All three are seasoned, highly reputable brokers for trading stocks, ETFs, index funds, and other investment products in the UK.

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An investor with a small amount of money should look to invest for the long term in low-cost global or total-market passive index funds and ETFs via the cheapest trading platforms.

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The cheapest trading platforms in the UK for index funds and ETFs are InvestEngine and Vanguard. These platforms do not charge a fund dealing fee, so you only ever pay the platform fee and fund manager costs. Other fees may apply.

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Here are the best online brokers in the UK:

1. eToro - Good for beginners who want to copy experienced traders.
2. XTB - Good for active traders seeking low-cost CFD and FX trading.
3. Interactive Investor - Good for trading and long-term investing.
4. InvestEngine - Good for short or long-term low-cost ETF investing.
5. Freetrade - Great for beginners wanting to trade fractional shares.
6. Hargreaves Lansdown - Great for extensive market research.
7. AJ Bell - Great for a UK-first experience (ISA, LISA, SIPP, etc.).

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The best trading apps in the UK are eToro, Freetrade, and Interactive Investor. These are easy-to-use, low-cost mobile apps for trading shares, ETFs, REITs, and other investment products.

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Most stock traders lose money because they make impulsive decisions driven by emotions such as fear and greed. They also tend to trade too frequently, increasing the chance of poor trades and incurring high brokerage commissions.

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Additionally, they often lack a solid investment strategy and risk management plan, which can lead to significant losses when the market turns against them. For example, a trader who buys a stock based on a hot tip from a friend without doing any research or analysis is more likely to lose money than a trader who carefully studies the company’s financials and industry trends.

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Traders who lose money also tend to chase market trends and follow the crowd, encouraging a herd mentality and potentially creating a market bubble.

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Credits

1. The Lang Cat
2. London Stock Exchange
3. GOV.UK

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