• Ethan Diamond

Retail Trading and Trading 212: Part 1

Updated: Jan 4

Fact: 90 per cent of retail traders lose money. That’s people like you and me. In this article, I’m going to shine a light on this harrowing statistic, as well as show you my favourite trading platform – Trading 212.

To understand why so many people lose money, let’s make sure we’re on the same page by reviewing the structure of the retail financial services industry.

Why do I need a Broker?

To cut a long story short, it’s because the system says so. You can’t call Tim Cook (the CEO of Apple) and say: “Hi Tim, I think Apple’s great, especially with the addition of the new Airpods Max, that’s exactly what consumers didn’t know they needed! I’d like to buy ten shares.”

Instead, Stockbrokers are the middleman - they provide a way to access the exchange. This may be a physical person you can call up to make the trade for you, or more likely an online trading platform. You’ve probably heard of a few, namely: Trading 212, eToro, IG Trading, and Freetrade.

How much does a Broker Charge?

Now you know these Stockbrokers provide a service, you must be wondering, how much do they charge? There’s no such thing as a free lunch in the world of finance! Fees vary from broker to broker with some offering zero commissions. You may have to pay a small, fixed fee to withdraw money or you may be charged a fixed percentage of each trade. It all varies from broker to broker, so make sure to do your own research! I’m going to focus on Trading 212, so eyes down solider and keep reading!

When you press Buy or Sell on Trading 212, what actually happens?

Before I answer that, let me give you a more simplified version. Imagine you want to buy 10 shares of Apple. You call your broker called Jim, and ask: “Hi Jim, buy me 10 shares of Apple.” Jim goes into a large market (the exchange) where there are many other brokers and professional traders working for Goldman Sachs, JP Morgan etc., and shouts “Hi everyone, who’s selling 10 shares of Apple?” Straight away Jim is bombarded with offers and buys 10 Apple shares and holds them for you.

Trade executed!

There are a few differences in reality. Firstly, Jim is actually an online trading platform such as Trading 212 and the shouting is done virtually - sending a Buy or Sell order into the exchange and waiting for it to be filled. Depending on the volatility of the security (the frequency of people actually trading it) this could be executed instantly or within a few seconds.

This is an example of an execution-only service. The trading platform doesn’t give any investment advice and takes no responsibility for any profits or loss – sounds a lot like us at The Student Investor!

How does Trading 212 make money?

Understanding how Trading 212 makes money is integral to understanding why 90 per cent of retail traders lose money.

There are essentially two types of trading accounts you can have on Trading 212 - CFD and Invest/ISA.

A CFD account allows you to trade with leverage, which means you can amplify your gains but also your losses. Even though you can't lose more money than you put in, it's a lot riskier than trading without leverage. It also allows you to short the market, which means you'll make money if a security decreases in value. Think of the movie, 'The Big Short' starring Brad Pitt... but more on that in Part 2! It’s great for experienced traders who may have had ten years working for a large investment bank, but, for people like you and me, I reckon it’s best to stay away. The fees involved are extensive and complicated and can be found on Trading 212’s website here.

An Invest account is almost identical to an ISA account but an ISA account is tax free up to £20k per year. You must pay Capital Gains tax on an Invest account if you earn profits above the tax threshold. Trading with these accounts means you can’t lose more money than you put in. The fees include Stamp Duty for the purchase of U.K. shares and ETFs, currency conversion, and something called the spread. The spread is simply the difference between the Buy and Sell price. Essentially it is the amount of money you would lose if you bought a share and then immediately sold it. Trading 212 provides a spread slightly wider than the market spread and will pocket the difference. More about spreads can be read in my previous article here.

Hopefully, you’ve worked out that Trading 212 wins whatever happens. They make money when you make money, and they make money even if you lose money! Without a proper education, most retail traders will lose money because they are effectively betting on a stock increasing in value based on pure hope and optimism.

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