When a company wants to expand its business, it’ll typically look to raise money. And a common way to do this is for the company to sell a portion of its business in the form of shares (or stock – they’re essentially the same thing) on the stock markets where absolutely everyone can buy them. If you buy one of those shares, you’ll become a shareholder in the company, meaning you’ll own a little part of the whole business. Now, shares are exchanged in a number of markets during trading hours. In the UK, for instance, the FTSE 100 is open Monday to Friday, between 8am and 4:30pm (GMT) and you can only buy or sell shares during these hours. But how does it work? And how frequently can you trade?
Can you buy and sell shares on the same day?
Yes, in fact, you can trade shares many times a day – in the investment world, this practice is known as ‘day trading’ and in 2020, we saw it surge in popularity as many people had to stay home and looked for ways to increase their income. Day trading is a technique that is usually best employed if you’re a professional day trader and have the skills and experience to make well-educated investment decisions. But in terms of regulation, anyone can take part in day trading, and there are more and more platforms out there offering no-minimum account balance, making it easier and more affordable for people to take the plunge.
Things to consider with day trading
Day trading, where you get to make quick trades relying on short-term fluctuations, can look quite appealing, but it’s important to know the risks that come with it – and there are many! Day trading is fast paced and focuses on the daily swings in share price. The aim here is to make a gain quickly and to do so, day traders would typically monitor the news and try to take advantage of any expected movement. Whilst some are able to make profits and share their success story, the technique doesn’t always pay off, and according to many studies, it’s very difficult to constantly make gain as a day trader. A Brazilian study found that 97% of individuals who day traded for more than 300 days between 2013 and 2015 lost money and only 1.1% managed to earn more than the minimum wage in the country. The academic paper concluded that it’s “virtually impossible for individuals to day trade for a living.1” A US study before that also found that it’s extremely hard for day traders to make a profit. According to the research, only a third of US day traders managed to make a gain between 1992 and 20062.
The other thing to consider when day trading is cost. Every time you buy or sell shares, you could expect to pay fees – some platforms will charge a fee for each trade (and often per unit) and ultimately, these charges could quickly add up if you make multiple trades a day. Why should you care, you ask? Well, fees will eat into your potential returns, so the more you’ve got to pay, the smaller your pot will be at the end. If you want to maximise your profits, you may want to either limit the number of trades you make a day, or you could adopt a longer-term approach to investing.
What are the benefits of long-term investing?
Unlike day trading where you buy and sell within a short-time frame, long-term investing is about holding onto your investments for a number of years. Obviously, with this approach, you need to be very patient and ignore short-term fluctuations as much as you can. But it’s a tried and tested method! According to many studies, the longer you stick with your investments, the more likely you are to see positive growth. Take people who invested in the FTSE 100 between 1984 and 2020 for example. Those who remained invested for ten years at any point during this timeframe had an 89% chance of making a profit – not bad, considering that this period included a number of market crashes, such as the 2008-09 Global Financial Crisis3.
The main benefit of long-term investing is that it gives your money more time not only to ride out market bumps, but also to flourish and compound. As a shareholder, you can receive payments from the companies you’re investing in. These payments are called ‘dividends’ and you can either cash them or reinvest them by putting them back into your plan – it’s completely up to you. If you choose the latter option, then your profits could potentially generate further profits, providing the environment is positive. Over time, your money could snowball, and your pot could grow exponentially bigger - and the longer you keep investing (and reinvesting your dividends), the bigger it could become.
Let’s take some examples to illustrate the power of compounding over time. Say you invest £100 a month in a Stocks and Shares ISA and decide to hold onto your plan for a number of years. After 15 years, you could end up with about £23,3844. But now, say you wait an extra ten years before withdrawing your money. After 25 years, your pot could be worth £48,292 – it’s an extra £24,9085! Who knew patience could be so fruitful?
Reference:
1: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3423101
2: https://www.tandfonline.com/doi/abs/10.2469/faj.v59.n6.2578
3: Data from Bloomberg
4: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £18,748. If markets perform better, your return could be £29,169. Values correct as of 13/08/20.
5: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £36,029. If markets perform better, your return could be £67,689. Values correct as of 13/08/20.
Past performance is not a reliable indicator of future results.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
