Before undertaking any kind of crypto trading or investing in stocks, it's a good idea to know what you're looking for. Nick Saunders, CEO of mobile trading platform Trading 212, shares his advice on the different types of investments and what the risks and benefits are
As if trying to understand how trading and investing in shares and stocks wasn’t difficult enough – there’s now more than 2,000 cryptocurrencies to keep up with, including Bitcoin, Ripple and Robinhood.
Sadly, it isn’t as straightforward as just buying stocks or digital currency and waiting for the price to snowball.
There’s a lot more to consider and Trading 212 CEO Nick Saunders is someone who has learned a lot over 20 years of working in the City of London with wealth managers, stockbrokers and trading firms.
He now runs the fast-growing fintech company, which offers a mobile trading platform to access shares, cryptocurrencies, commodities and other financial instruments.
Speaking to Compelo, he discuses the different types of investments available, what to look for and knowing the best time to buy.
What are the main differences between trading and investing?
Trading is high risk, with the potential for large profits and losses.
Investment is generally more about wealth preservation, with a very different attitude to risk.
Both traders and investors are looking to make money; with bank accounts paying minimal returns, leaving money uninvested means its value diminishes in real terms.
The difference between the two terms really is one of time frames.
An investor looks to place their money in a chosen instrument for a long period – months, if not years, whereas a trader typically looks for a shorter term gain.
I think it is broadly correct to say that an investor picks investments that have a good long-term revenue stream, whereas a trader will place trades not on company fundamentals but on anticipated price movements.
Of course a trader may look at fundamentals, but as a way to second guess what investors are going to do – the trader wants to buy a share early, for investors to lift the price, then sell out.
The tools a trader uses may be very different – traders make extensive use of charts to predict price movements, but will rarely look at a company’s competitive landscape.
Some instruments are well suited to trading – Contracts for Difference [a contract that ends with the buyer and seller exchanging the difference between the opening and closing prices of a specified financial instrument, including shares or commodities], traded options, futures, where the cost of building a ‘position’ is relatively small, but the cost of maintaining it for a long period is high.
When’s the best time to trade?
Traders thrive on volatility, so will trade whenever the opportunity presents itself.
In the case of cryptocurrencies, which trade 24/7, this can mean trading in the middle of the night and at weekends.
For an amateur trader holding down a ‘normal’ job, this can be ideal.
They can choose instruments to trade that fit around their schedule – US or Asian shares, currencies and cryptos are all active at non-conventional working hours.
Smartphone trading means trading is available at all hours pretty much anywhere.
While this has a democratised access to trading, the ease of access to what can be complex, sophisticated products has drawn a raft of novices in.
The answer to the question ‘when is the best time to trade?’ should never be ‘when I have some money and want to take a punt’.
What are some of the risks and benefits that come with trading?
There’s no question that the risks and benefits are largely financial.
Successful traders can make huge amounts or money and, if they use the right products, can pretty much avoid paying tax.
According to industry statistics though, roughly 80% of traders using Contracts for Difference to trade (probably the most common trading product among retail traders in the UK) lose money.
New guidelines from ESMA will force companies to disclose the percentage of winning clients from August, as well as restrict potential losses to the amount deposited on a trading account.
Beyond the financial rewards, there are clear lifestyle benefits to full-time trading – the hours and location are not fixed and can vary from day to day.
There is also a sense of achievement in ‘outsmarting’ the market.
Traders tend to see the market in confrontational terms – for them to win, someone else has to lose.
Investors are rather the opposite – a good investment can be mutually beneficial.
What are some of the rules you must know before you start investing?
- Understand the risks of the investment – can it lose money? Can you be asked to pay more money in to keep the investment?
- What are the ongoing charges? Do you have to pay for an investment platform or a tax wrapper [? Keep track of the overall charges, not just the profit and loss (P&L) statement from the investment
- Avoid scams – invest only with authorised firms. Don’t respond to cold calls.
- What sort of risk are you happy with? Higher returns come from higher risk.
- Diversify! Think about geographic, industrial and instrument diversification. Look at funds to achieve this and help access investments such as property, cryptocurrency or infrastructure which are difficult to invest in in small size.
- Don’t be afraid to sell at a loss if you think it will avoid a larger loss in the future.
- Act – don’t be immobilised by fear. Being passive and hoping something will happen is likely a bad strategy. Being decisive is not always easy, but will avoid missed boats.
- Try to be dispassionate. Investments made for emotional reasons tend to be poor investments. Have firm levels at which you will sell out, both for a loss or a profit.
What are some of the investment vocabulary used and what does it all mean?
Here’s a few key terms defined by American investment banker JP Morgan.
Growth investing – Investment strategy that focuses on stocks of companies and stock funds where earnings are growing rapidly and are expected to continue growing.
EPS – The portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability.
Rights of accumulation – The right to buy over a period of time. For example, this might be done by an institutional investor to avoid making a single substantial purchase that might drive up the market price, or by a retail investor who wants to reduce risk by dollar cost averaging.
But for a more definitive list of trading terminology, I would struggle to give you anything more comprehensive than this.
After buying stocks, when should you sell?
A really hard question. Most simply, when you have a better use for the money.
Obviously if you think the price is going to drop then selling and re-investing in a more profitable share is the right answer.
It pays though to take an overall view of your personal circumstances – is the anticipated return on the investment lower than then interest on a car loan or a mortgage?
Rebalancing a portfolio is another good reason to sell. As mentioned above, diversification is important in a balanced portfolio.
Selling a profitable investment to spread the risk makes good financial sense.
How does a beginner pick the best stock investments? What do they need to look for?
The most important tip for a beginner is think about the level of risk that they are comfortable with.
Penny shares are much riskier than investment trusts as a rule, but are seductive as the potential for rapid growth is there.
In terms of building an investment portfolio of shares from scratch, plan to diversify.
Look for stocks that are expanding geographically or have significant revenue streams outside the UK – this helps reduce currency and geographic risk.
In terms of growth, think about how people will be using technology in two or more years time – mobile payment firms, for example, have taken advantage of this.
Look for the companies that have a history of adopting new technology and which are the followers.
The reverse of this is, of course, to look at which business models are under threat – what is the future for print media? Who can adapt to survive?
For long-term investment, look for long-term value.
A trader looks for quick price movements, but an investor may be more concerned with the yield of a share.
Infrastructure funds, for example, are not fashionable but have a solid yield and underlying assets.
Lastly, don’t slavishly follow fashion. Solid stocks in the FTSE 100, such as oil companies, pharmaceuticals, support services and insurers, are the bedrock of investment.
They have a good revenue stream, which should be properly audited and decent yield.