Stock trading is buying and selling stocks, or shares in a company, on a stock exchange. The UK has two leading stock exchanges: the London Stock Exchange (LSE) and the Alternative Investment Market (AIM).
Most people trade stocks through an FCA-regulated broker, such as Saxo. A broker is a firm that buys and sells stocks on behalf of its clients. There are different brokers, but the two main types are ‘discount’ brokers and ‘full service’ brokers.
Discount brokers charge lower fees than full-service brokers, but they don’t provide services such as research and advice. Full-service brokers offer these services, but they charge higher fees.
London Stock Exchange (LSE)
The London Stock Exchange is the largest stock exchange in the UK and one of the largest in the world. It’s located in the City of London, where most big companies are listed.
To buy stocks on the LSE, you need to open an account with a broker authorised to trade on the exchange.
Alternative Investment Market (AIM)
The Alternative Investment Market is a stock exchange for smaller companies. It’s located in London but not as well-known as the LSE.
To buy stocks on AIM, you must open an account with a broker authorised to trade on the exchange.
Direct stock purchase plans (DSPPs)
Some companies offer direct stock purchase plans (DSPPs), which allow you to buy their shares directly from the company without going through a broker.
DSPPs are an excellent option if you want to buy shares in a company that’s not listed on a stock exchange.
Contact the investor relations department to determine if a company offers a DSPP.
Online brokers are firms that let you trade stocks online. They’re usually ‘discount’ brokers, which means they charge lower fees than full-service brokers.
To open an account with an online broker, you generally need to deposit money into the account. You can then use this money to buy stocks.
Foreign stock exchanges
If you want to buy stocks listed on a foreign stock exchange, you’ll need to open an account with a broker that offers international trading.
International brokers typically charge higher fees than domestic brokers, and there may also be different types of accounts available depending on your net worth and your frequency of trading.
Risks of stock trading
You could lose money
The value of stocks can go down and up, so you could lose money if you sell your shares.
Stock prices can be volatile
Stock prices can be volatile, which means they can go up and down a lot in a short time, making it difficult to predict what will happen to the price of a stock.
The market can be unpredictable
The stock market is unpredictable, and prices can go up or down at any time, making it risky to buy stocks.
You might not be able to sell your shares
If you buy shares in a company that’s not doing well, you might not be able to sell your shares because there might not be any buyers for your shares.
You might not get dividends
Dividends are payments that companies make to their shareholders. If a company doesn’t make profits, it might not be able to pay dividends.
How to reduce the risks of stock trading
Diversify your portfolio
Diversification is a risk management strategy involving investing in various assets. If one investment goes down in value, your other investments might increase, which can offset the loss.
Invest for the long term
Investing for the long term means you’re more likely to ride out any short-term fluctuations in the stock market because the price of stocks tends to go up over time.
Use stop-loss orders
You can place a stop-loss order to sell a security when it reaches a specific price. It can help you limit your losses if the price of a stock falls.
Do your research
It’s essential to do research before buying stocks. It includes researching the company, its financial situation and the overall market. You can also use a stock screener to find stocks that meet specific criteria, such as being undervalued by the market.
Use a demo account
A demo account is a simulated trading account that lets you test a trading platform without risking any real money. It is an excellent way to get the hang of stock trading without risking your money.