At the end of March 2020, just as lockdown 1.0 was about to start, the search term ‘trading on the stock market’ shot up. In hindsight, that was probably unsurprising because people had a lot of time on their hands and wanted to use it to earn some extra cash. But was it was just a fad?
What is less surprising is that in December 2020, the same key terms were searched even more times!
You’d have to go all the way back to 2016 to see similar statistics for those search terms.
A lot of the results for this search term lead to websites owned by trading platforms, who often reel people in and then offer very risky leveraged products. At a time when interest in the stock market continues to rise, the need for beginner-friendly, impartial content is important.
1. What’s the first thing I need to do to start investing on the stock market?
Some may say the first step is to open a trading account.
Before even thinking of opening a trading account, you need to understand the nature of trading on the stock market and understand what risks are involved. Too many people skip this bit and go to the stage of setting up a trading account and then begin to trade with no understanding of the risks.
In the first instance, the stock market is a non-physical place where investors (including individuals and institutions) can buy shares in a company. A share represents a slice of a company. But nowadays, things have become a lot more complicated and you should take your time to understand the different asset-classes you can buy (more on that later). The value of your shares may increase, decrease or remain the same. No one knows which way the price will move.
A trading platform, meanwhile, allows ordinary, non-institutional investors to buy and sell shares on the stock market. In fact, these days a trading platform allows investors to buy and sell different asset classes (such as gold and cryptocurrencies).
The risks you take on depend on the type of trading you do: 1) Equity investment: straightforward buying and selling of shares
The greatest risk with straightforward buying of shares is that it’s possible to lose all the money you invest. Though this is incredibly unlikely, you need to accept that this is theoretically possible.
This may occur if a company collapses or is kicked off the stock exchange.
The second, smaller, risk is that you may lose some of your money. This occurs when you sell shares for less than the purchase price.
This may be likely for a number of reasons. For example, perhaps you invest into a stock but then some sort of emergency comes up and you need to sell the stock to release some money. Obviously, if the sale price is less than the purchase price, you’ll make a loss.
Also, some investors sell shares at a loss intentionally. ‘How does that even make sense?’ I hear you ask. Well, sometimes an investor buys a stock, but the stock performs poorly. Then they spot a better opportunity elsewhere and decide to release funds from the poorly performing stock. They’ll accept the loss because they can make a big profit on the next stock. So overall, it’s worth it. Of course, there’s no guarantee the next stock will do any better.
With straightforward purchase of shares, the most you can lose is the amount you invest. So, if you invest £100, the most you could lose £100. Even if the company you invest in runs up huge debts, you will not have to worry about bailiffs coming after you because you theoretically ‘own’ 0.00000000001% of the company. It’s a different type of ownership.
2) Leveraged purchase of shares: high risk and complicated
It’s also possible to use something called ‘leverage’. You should never use leverage. One reason is because it’s risky. But more importantly, it’s haram.
(We won’t get into the nitty-gritty of leveraged trading because it’s not something you should consider engaging in. At all. However, you need to know enough to be able to spot it so you can stay away from it)
To use ‘leverage’ means to be able to buy more shares than you can actually afford. So, suppose you have £100 to invest and you use 10x leverage, it means you can buy shares worth £1000. Of that £1,000, only £100 is yours; so where did the remaining £900 come from? The trading platform will lend the remaining £900. They will charge interest on the £900 on an over-nightly basis.
When leverage is used, the trade is effectively amplified. So, in our example above, any profit would be amplified 10x. But so, too, will any losses. And this is where the problem lies.
Suppose you buy shares in Google using 10x leverage. Now, if the share price dropped by $20, then you’d be down $200 dollars (because your whole trade is amplified 10x). If you sell the stock, you’re guaranteed a $200 loss. So, you may decide to hold on to it until the next day because the share price may recover. So, you now owe the trading platform overnight interest fees. If the share price takes another tumble the next day, again, your loss is multiplied 10x. Within a short space of time, you could find yourself with debts that you may not be able to afford to repay. The temptation may be to hold on to the shares until they recover in price, and pay the overnight interest fee in the meantime. This is actually worse than it sounds because inevitably, you’ll have to hold the stock over the weekend. This is a double whammy because the interest rate often increases over the weekend.
You may be able to buy and sell on the same day and return the borrowed money to the trading platform without incurring the overnight interest charge. However, no one can guarantee the direction of share price, which means you’d be accepting paying interest charges in the event you can’t sell your shares on the day...or accepting a 10x theoretical loss on your stocks (…to continue with our example).
If you did not understand the explanation above, it’s ok. All you need to know is that using leverage is basically haram because an overnight interest fee is charged.
When leverage is being offered, you’ll see terms like ‘5X’, ‘10X’, ‘20X’ (or any other number followed by an ‘X’), “leverage” or “exposure”. If you see these terms, do not proceed with the transaction until you are sure it’s not a leveraged transaction.
3) CFDs (contract for difference): Extremely complicated and extremely high risk
CFDs are a strange transaction that involves borrowing shares from your broker to then sell on to someone else.
But why would anyone do that? Because the seller believes the share price will tumble.
So, let’s say the seller (let’s name him Adam) borrows £100 worth of stocks and sells it to Mr Joe Blogs for £100. And then the share price really does drop – just as Adam expected. Now, Adam, the seller, will buy the same stocks (possibly back from Mr Joe Blogs) for, say, £70. Now, Adam has the original amount of shares again, which he can return back to the broker (because he still owes the broker the shares). Adam has now returned the borrowed shares and also pocketed £30 the difference (between what he sold the shares to Mr Blogs for and what he bought the shares back for after the price dropped).
By now, you may be thinking this makes no sense; how could Adam have ‘sold’ shares he didn’t even own? And you’d be right - this doesn’t make much sense, but this is a type of trade that unfortunately exists.
But why would a broker ‘lend’ stocks? Simple - because they can charge interest on it.
Again, if you did not understand the above, it’s ok. All you need to know is that it’s haram.
Not only will you be paying interest, but you’ll also be selling something do not own. Both are, of course, haram.
Perhaps CFDs should be renamed ‘complicated, forbidden and dangerous’.
If you decide to get involved with the stock market, stick to straightforward buying and selling of shares.
The truth, though, is that the risks associated to the stock market can be reduced to negligible amounts, which is presented as actionable advice in another article.
2. Setting up a trading account
Okay, so now that you have a better idea of…
(a) The risks involved
…You’ll want to open a trading account.
Obviously, it’s not possible to buy shares directly from a company; companies may have millions of shares in circulation, so selling shares directly to investors would be too impractical. The way around that is to use a trading account (sometimes referred to as a trading platform).
So, which trading platform should you open an account with? There are hundreds of different platforms that exist. Each has its pros and cons. Therefore you’ll have to decide which one to go with based on your individual needs.
One way to approach this is to search ‘what’s the best trading platform’ in Google. There won’t be a shortage of answers, but every answer promotes the platform which will pay a commission. You’ll have to decide whether that makes it partial or not.
The best way, I find, is to speak to people that have experience of a particular platform. This will be the most impartial way of finding information. If you don’t know anyone that has experience of using a trading platform, then check out the section on platform reviews on this site. Each platform has been reviewed by a different Muslim investor who actually uses the platform.
Apart from cost and reliability considerations, one of the biggest factors you’ll need to consider is whether the trading platform is desktop-only (like X-O), app-only (like Freetrade) or both (like eToro).
Ultimately, this is a decision you need to make for yourself based on your own preferences.
But before you sign up, keep the following things in mind:
Trading fees: are you happy to pay a fee each time you buy and sell shares?
Platform fees: are you happy to pay a fixed monthly platform fee irrespective of whether or not you place a trade?
Ability to trade in multiple global exchanges: do you need the ability to trade all over the world? Some platforms only allow trading in a handful of countries
Customer service: is it important to speak to someone on the phone? Some of the newer platforms do not offer this
App-based or desktop-based: Some of the platforms are mobile-app only. Will you be okay with this?
Wide range of stocks: Would you like the ability to invest in thousands of companies, or will a handful do? Generally, the more expensive platforms offer more companies to invest in.
I personally have experience of Interactive Investor, X-O, Freetrade, eToro and to a very small extent, HSBC Active Invest. They all have their strengths and weaknesses. It may be that a person loves Freetrade and raves on about it. But if being able to trade on a desktop is important to you, then a mobile-only platform like Freetrade will be no good for you. I discussed these in a lot of detail in my six month trading review and also have reviews of these platforms in the review section.
It might not be a bad idea to sign up to a free platform initially to test the water. If you realise you would like to trade for a longer time, perhaps you could consider joining a platform more suited to your needs.
Be prepared to provide your National Insurance number/ Tax ID and your address. In some cases, you may need to provide proof of ID and proof of residence. This is a relatively new rule for investors in Europe. Before 2018, this was not required.
When I opened a HSBC trading account, it took the best part of a week to open the account. The newer ones are more nimble with their on-boarding process and can get you signed up within 48 hours sometimes.
3. Decide what stocks you want to buy
Ideally, you’ll already have an idea of what stocks interest you. Whatever those stocks may be, you need to carry out research. Thorough research.
Researching stocks now is so much easier than it used to be even 10-15 years ago. In fact, there are a number of things that you could research in addition to the standard financials, such as whether directors in a company are dumping their shares.
You may find the brief article discussing clever hacks useful. I’ve decided not to include advice on stock research itself in this article since I have covered this topic extensively elsewhere on the site.
4. I can finally buy my first share now, right?
You can buy shares at any point- that’s entirely up to you. The steps outlined in this article are intended to make you aware of what you can expect in the trading world, both in terms of risk, technology and much more.
But before you start trading, it’d be wise to use a dummy/ virtual account- most trading platforms offer this. If you realise you’re a serial loss maker on your virtual trades, chances are you’re not ready to trade with real money just yet. In addition to saving you money by avoiding bad trades, using a dummy account also helps you become proficient at buying and selling shares. You’ll get used to some of the other options, too, like limit orders, setting up watch lists, generating statements and so on.
5. I’ve signed up to a trading platform, how do I start trading/ investing?
Buying shares…
Most platforms make it very easy to buy shares. In fact, sometimes it’s possible to buy shares with just a single click!
The first thing you need do is to search for a stock using the search facility.
So, on the eToro platform, it should look like this…
Meanwhile, on the Freetrade platform, it should like this…
As for the X-O platform, it should look like this
Once you’ve found the share you want to buy, you enter the quantity of shares you want to buy, or a monetary value you would like to spend (and the programme works out how many shares that corresponds to). You then click buy.
If you get an option to ‘order’ the shares instead of buying them, there may be a few reasons for this: a) You’re trying to buy stocks on the weekend, when the stock market is closed
b) You’re trying to buy stocks on a weekday, but after 4pm, when the UK stock market closes (stock markets close at different times around the world)
c) You’re trying to buy shares in a company that has a small number of shares in circulation and no shares are available to buy
d) Your trading platform is experiencing some sort of problem
The newer platforms make buying and selling shares seamless, but there are slight differences between each platform.
For example, when buying shares on eToro, one click results in the purchase of shares. This is great for people looking to buy and sell shares that benefit from small fluctuations in the share price. However, it also means a mistaken click may result in shares being purchased.
On Freetrade, one has to press ‘buy’, then confirm the purchase by entering a pin. This makes mistakenly buying shares very unlikely. With both of these platforms, the price you decide to buy shares at may not be the price you actually end up paying for the shares. This is because the stock price fluctuates many times a second. Sometimes it means you’ll end up paying less than what you were willing to pay. Other times, you may pay more. My advice would be not to lose sleep over this- it’ll average out.
With eToro, the price may fluctuate several times a second. As for Freetrade, one never knows the final price – it feels like a stab in the dark.
X-O offers a 15 second window where the price stays ‘locked’. If you buy within those 15 seconds, the price you see is guaranteed. This is useful when purchasing a large number of shares because even a difference of 1p (or less) can really add up when you’re buying thousands of shares in one go. After the 15 seconds have elapsed, it will time out automatically and you’ll have to try again. This is also the case with Hargreaves Lansdown and other more traditional trading platforms.
Selling shares…
Selling the shares involves the same process, but obviously you’d have to press ‘sell’ instead of buy.
Taking profit out...
Whenever you sell a share, the proceeds from the sale is returned to your trading account. This money can then be used to place another trade if you wish.
Some platforms take longer to return the proceeds of the share sale than other platforms. For example, eToro returns the money more or less instantly. Freetrade, meanwhile, may take a day or two.
One thing consistent with all platforms is that transferring money from your trading account to your bank account takes a few days.
With eToro, you’ll be charged $5 to withdraw your money. So it doesn’t make sense to withdraw small amounts. With Freetrade and X-O, there is no charge.
Do bear in mind that your money is always returned to whichever bank account it came from. This is a security measure.
Are there any hacks?
It seems these days everyone loves a hack. Here are some tips:
a) Establish a watchlist
After you’ve researched a stock for commercial viability and shariah compliance, place that stock on a watchlist. The vast majority of stocks are not shariah compliant, so whether or not it’s commercially viable is immaterial. Collate a basket of halal stocks on your trading platform watch list. Every time the share price takes a dive, you’ll be able to buy the shares quickly. This is very important for traders, but less important for investors.
b) Set up price alerts
If you’re looking to hold a stock for the short term and wish to sell when a stock hits a certain price, then there are three options: 1. Set up a limit order: The platform will automatically sell the stock at the pre-determined price. However, not all platforms offer this function.
2. Manually check the price frequently: Very labour intensive, but it does mean you won’t have to rely on technology 100% of the time.
3. Set up a price alert: receive an email or push notification when a stock reaches a desired price.
c) Focus on a small number of stocks
This is a tip for traders only who intend to buy and sell multiple times within the same trading session. Traders need to frequently buy and sell shares. Therefore, it makes sense to focus on a small number of stocks. If you focus on too many shares, it splits your focus and opportunities may be missed.
If you're ready to participate in the stock market as an investor or a trader, we wish you success and hope this article has been helpful. If, however, you feel you need a bit more guidance before you take the plunge, our free 30 Day Trading Programme coulld be for you! In it, you will learn about the Islamic Pinciples of Investing, Basics of the Stock Market and how to use a trading platform to buy and sell shares.
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