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7 Key Questions to be More Financially Savvy through Online Trading

29th June 2017

If there is one product advertised everywhere in the last few years, it is online trading accounts. You have probably noticed.

Online Trading - Keyboard and Mouse with Pay button

The message put forth to promote DIY wheeler-dealing varies: either ‘George started with $100 and now owns a Greek island’ … Or unconvincing first-person testimony – ‘I made $1,247 in three days’ – with the profit never a round figure .

There’s a very good argument that trading online can help not only add a bit of pocket money for that upcoming holiday, but improve your financial knowledge to the benefit of your home finances and discussions with your independent financial adviser.

But it makes sense that you keep things simple and that it doesn’t incur more harm than good. So let’s delve in.

Question 01 : What’s an online trading account?

Trading accounts allow adults with a bank account to transfer money to a ‘platform’ that allows them to buy and sell different asset classes. Many platforms will focus on shares alone, maybe a mix of asset classes, while some specialise in more exotic products such as contracts-for-difference (CFDs), where the trader takes one side of a two-way bet.

Question 02 : What if I’ve only heard of company shares?

Fine. Your overall account will have two main components: the cash account, which receives the funds from your bank as well as the proceeds from selling shares, while the shares account shows the value of the asset you’ve bought. The shares account will vary in value from Monday to Friday, since the price of company shares move up and down.

When you set up an account, the money you commit must be of an amount that you can conceivably lose without leaving you unable to pay for your regular expenditures. So you can explore and invest without risking your family’s plans or lifestyle.

Question 03 : How do I choose which platform to use?

Great question, given the jungle of advertising. You’ve got to be a bit of a watchdog in terms of the best deals. Platforms will compete for your custom in areas such as commission (e.g. how narrow the platform can afford to make the bid-offer spread, which is a key revenue for them), FX rates, fees (such as charges relating to withdrawing funds) and high-touch interfaces that work on your smartphone on the go. (Topbrokers.trade – a comparison site – flags up other bonuses you can look out for such as customer support and regulation.)

Many platforms allow access to different stock exchanges and different currencies. So while the advertisement might flag up ‘market access’, ‘best execution’, and multi-currencies, bear in mind these are common attributes.

Question 04 : What’s the bid-offer spread?

Buying shares requires a stated quantity at a price you’re willing to pay. An electronic broker will quote you a price at which it will sell you those shares, and a price it will buy them – the difference is the bid-offer spread.

Don’t be surprised therefore if you can’t buy shares for the stock market price at that instant. Your ‘bid’ will be matched with the same quantity that is on ‘offer’ for the same price. A successful match will then be what’s-called “cleared”, then settled, and then you own the shares, its rights and dividends (if there are dividends).

Question 05 : What shares should I buy?

You’ve likely only heard of a fraction of the companies listed on the London Stock Exchange (LSE), and they’ll typically be some of the biggest companies. Not to worry!

LSE categorises companies by their size (along with other classifications) – with the FTSE100 constituting the biggest 100, followed by FTSE 250 (the next 250 in size), right down to small UK companies – or foreign companies listing just some of their shares in London – on the FTSE AIM.

Dipping your toe in by buying the big companies you’ve heard of gives a useful grounding in the link between news about the company and its impact on the share price. Often the news story will mention how much the price has risen or fallen since whatever news occurred.

After a few share purchases to get you up and running, the second question should start to arise: why would I buy this company?

Some amateur traders buy companies in the industry in which they work. This way, the trader already knows something about the relevant companies, such as that Company X is embarking on potentially profitable ventures, and that future news will benefit the share price.

When exploring companies new to you, your reason for buying – or not buying –  should be the same, shaped by these kinds of questions:

  • Is the company making money? – A crucial overall contributor to long term price rise.
  • Does the company have a lot of debt? – If the company is paying off creditors, then less of the revenues will translate into net profits (and therefore shareholder dividend); debt can keep the lid on a price rising.
  • Does the company have a unique product or service in a sector that’s growing? An example would be Bango plc, a mobile payment technology provider. Are smart phones and phone-based shopping on the rise? Yes. And this year, it has borne fruit: up 146% from 69.5p to 171.5p since the start of January to 22 June.

To answer these questions, you’ll need to get information about the company. Stock market ‘listed’ companies are required to publish information about their previous quarter’s business activities. Study these and you will have your answers about profitability and debt, while their websites and news coverage should indicate if they compete in their industry.

Question 06 : Have the benefits to overall financial knowledge been proven

Academics say that if you get involved in online trading then you will get better at personal finances. A research paper in The Journal of Finance (Campbell, 2006) found a link between stock market participation and greater understanding of other areas of personal finances, including diversification and taking advantage of mortgage refinancing. Hilgert et al. (2003) found the same: higher financial knowledge led to improved management of personal finances, including budgeting and planning.

Question 07 : So how does it help my chats with my IFA?

If you trade online, you will begin to develop a “feel” for money and the markets. This will put you in excellent stead with your IFA. You will be able to ask powerful questions to keep your personal finances focused.

In your research then, get to grips with companies and their results first. You don’t have to learn everything at once. Have a look at different industries and the impact of overarching items such as interest rates and energy prices; consider, for example, how a cut in the oil price might positively impact a steel or food maker that must power its factories.

Your knowledge of companies and the economy will expand in no time, if only in small steps, and can be the springboard for your discussions with your IFA, such as:

What are the growing sectors and regions right now? How can these sectors be tapped through savings plans or lump sum investments? As with the individual shares held in a trading account – why this or that sector, or fund? How would, for example, low interest rates affect the return on funds invested in bond markets? Grill your IFA!

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