The UK stock market roller-coaster ride continues to throw up opportunities for profits. Those looking at the price charts for 2020 will see countless opportunities to have made a considerable return over a short time period.
Investors with a buy-and-hold approach will note that between February 2016 and May 2018, an investment in the FTSE 100 index would have generated a return of 43% – not a bad return if you just wanted to take a position, forget about it and concentrate on the day job.
The UK stock market roller-coaster ride continues to throw up opportunities for profits. Those looking at the price charts for 2020 will see countless opportunities to have made a considerable return over a short time period.
Investors with a buy-and-hold approach will note that between February 2016 and May 2018, an investment in the FTSE 100 index would have generated a return of 43% – not a bad return if you just wanted to take a position, forget about it and concentrate on the day job.
FTSE 100 price chart – Weekly Candles – December 2019-August 2020
FTSE 100 price chart – Monthly Candles – June 2014-August 2020
Every trader has a different investment profile. Gaining an understanding of what yours is, and developing an understanding of the different approaches, can help your bottom line. There are lots of ways to invest in stocks, and running through a few questions can help you find the best one for you.
The process of investing in stocks in the UK is relatively easy, but factoring in a few key points can help stack the odds in your favour. A methodical approach recommended by experienced traders includes the below:
- Investing in stocks – the basics
- Buy and hold – the straightforward approach
- More active trading – short-term investment periods
- Copy trading – something new to try?
- How to make a profit trading – trade execution costs
- How to make a profit trading – financing costs
- Where to invest
Investing in stocks – the basics
Whether you are a novice or an advanced trader, it’s important to consider the amount of time and resources you can offer to trading.
Also, keep a close eye on how this changes over time. Building in some contingency is also a good idea. The markets are a dynamic environment and noisy markets require more attention. Equally, unless trading is your day job, you may find that your attention is drawn away from the markets.
Buy and hold – the straightforward approach
Buying some stocks – and let’s face it, forgetting about them to some extent – is a tried-and-tested investment method.
‘Over-trading’ is a common pitfall for beginner traders. Saying that, there is a need to get your market timing right.
The benefit of this approach is that it’s relatively hands-off. A lot of investors are looking at investing in the stock markets for a return on their cash. With global interest rates as low as they currently are, any kind of return will likely beat what you can get at a high street bank account.
More active trading – short-term investment periods
Revisiting the price chart for the FTSE 100 in 2020 shows the opportunities that come with more active trading.
If you had sold short in the FTSE 100 at the market top in January and ridden the COVID-19 crash-down until March, you would have made a 37% return.
FTSE 100 price chart – Weekly Candles – December 2019-August 2020
The market bounced back, posting a gain of more than 40%. If you had bought at the bottom and held, you would have made a return of almost twice what the buy-and-hold strategy generated over a period of years.
Modern online brokers such as IG, eToro and Pepperstone offer CFD products that allow you to sell short the market as well as going long. The trade works in the same way and your profit/loss on the trade is simply calculated by the price difference between your entry and exit points on the trade.
Copy trading – something new to try?
Copy trading offers a balance between active, even daily, trading and buy and hold. The neat feature here is that you outsource a lot of the research workload to third parties, who then share their trading signals with you.
Broker eToro has a particularly strong position in this market. A large percentage of the firm’s millions of clients use the platform’s copy trading service.
The approach involves selecting a particular trader from the many thousands that are on offer. They are graded in terms of their risk profile, and it’s possible to dig into their performance track record.
Most brokers offer some form of copy trading. Picking a winner is, of course, important, but do also keep an eye on ‘operational risk’. Due diligence of candidates can include checking if they trade with their own money or virtual funds – you want the lead trader to have some skin in the game.
Also, ensure that the signals are applied to your cash pile rather than you giving up your cash to them. Don’t allow your money to leave your account – you might not see it again.
Modern online accounts at regulated brokers are very similar to online bank accounts. As long as you don’t share your log-in details and keep your cash safe, you’ll also likely benefit from deposit protection schemes such as the UK’s Financial Services Compensation Scheme (FSCS).
How to make a profit trading – trade execution costs
Increased market volatility means that price targets tend to be hit sooner rather than later. It is still important to ensure that your trading profits aren’t eroded by trading costs.
All brokers offer a bid-offer spread on the markets they provide. At any one time, there will be a slight difference between the price that you get for selling and buying the same thing. This is how brokers make their money.
The good news is that the online broker sector is highly competitive and most brokers are at least in line with their peer group. Once the broker has taken its cut from the initial trade, there are no further commissions to pay on any profits you make on trades. Those are yours to keep.
How to make a profit trading – financing charges
While the bid-offer spreads offered at brokers catch the headlines, there are also other costs to consider. For buy-and-hold traders, these can be even more important.
Using leverage on a trade, for example, effectively involves ‘borrowing’ money from a broker to trade in larger size. Not only does this scale up your risk-return, but it also generates a daily ‘overnight financing charge’.
If, for example, you are looking to take a long-term view on airlines recovering from the COVID-19 pandemic, you might want to consider a long position in EasyJet (LSE:EZJ).
You can buy as little as $50 worth of EZJ stock at eToro. The below screenshots show a more aggressive position of $500 being put on.
Source: eToro
With no leverage being applied, we are ‘buying the underlying asset’ with no financing charges and
‘commission free’.
Using leverage of x2, the exposure of the position moves our position into a CFD (contract for difference), which equates to $1,000 and comes with a daily financing fee of $0.16.
The T&Cs on financing charges differ from broker to broker, and although relatively small, can rack up. If you’re trading a strategy with a medium-term or long-term holding period, then you would do well to double-check how they impact your break-even calculations.
Where to invest
You may already have an idea on what UK stocks you want to invest in. Maybe a news article has piqued your interest and prices just seem too low. Trading what you know is a good first step. If you want to gain exposure to equities but are unsure about which name to buy, help is on hand.
Most of the top stock brokers have extensive research and analysis sections on their sites.
The competition between brokers is not limited to trading costs. Some offer better educational and analysis materials than others. It’s good to shop around for ideas and try trading them on a Demo account first.
It is crucially important to choose a regulated broker with a strong background. Not only will the functionality be tried and tested by millions of users before you, but ensuring that your funds are safe is also of paramount importance.
With this in mind, it’s a good idea to limit your broker selection to brokers that operate under licence from a range of Tier-1 regulators, including:
- The UK’s Financial Conduct Authority (FCA)
- The Australian Securities and Investments Commission (ASIC)
- The Cyprus Securities and Exchange Commission (CySEC)
Best Brokers to Buy UK Stocks:
eToro: 68% of retail CFD accounts lose money
Take a lookTickmill: FCA Regulated
Take a lookIG: Over 16k stocks to trade
Take a lookFinding the right broker for you is perhaps the most important part of the process. While you can buy UK stocks with most brokers on the market today, not all brokers are created equal. If you're ready to start trading, you'll need to use a broker that is FCA regulated, has low trading commissions and a reliable trading platform. Finding one can be an arduous and daunting task, which is why we've hand-picked favourites that tick all of these boxes to help you get started.
The bottom line
The process of registering with an online broker and investing in stocks is incredibly simple. Also, if you take care with your selection, your trading will also be cost-effective and safe.
As the aim is to make a profit, it’s important to make an honest appraisal of your investment aims and how you might be equipped to meet them. If you also factor in some of the basic good housekeeping pointers, then you are going to be starting out from a good position.