Did you know it costs a trading platform around £1 to execute a trade for you. As per the Financial Times, Ivan Ashimov, founder of Trading 212, says:
It costs investment platforms just £1 to execute deals on behalf of investors, most of which goes on clearing (the transfer of stock ownership from one company to another) and settlement. The actual cost of executing a trade on exchange is very low — as little as pennies.
Some platforms charge north of £10 per trade. Others, meanwhile, do not charge you anything for executing the trade. Why the polar opposite pricing?
But many of the challenger platforms don’t charge a fee. This begs the question how exactly these platforms are able to make money. There are a few different ways – some more obvious than others.
1. Spread
A spread is often involved with challenger platforms. In short, investors might pay more than the listed price on Google for a share and thereby make a profit.
2. Subscription
Platforms like Freetrade as encourage users to sign up to their subscription option- a bit like how Netflix makes its money.
3. Interest from a bank
Freetrade openly admits it uses customers’ money deposited into their Freetrade account (but not yet utilised) to generate interest from a bank account.
4. CFDs (Contract For Difference)
This is the most complicated way certain trading platforms make their money. Without getting into the nitty gritty, CFDs is a facility which loans investors money for the purpose of investing into stocks and charges interest on an overnight basis on the loan. If an investor is unable to repay the money by Friday, then extra charges are often levied over the weekend. There’s a toxic psychology at play with CFDs. No investor wants to lose money – especially when the original capital is borrowed money that needs to be repaid with interest. In practical terms this often means that if an investor buys a stock using the CFD facility and then the value of the stock drops, the investor often feels they need to hang on to the stock until the price of the stock recovers. Of course, with no guarantees when (or if) if the stock price will rise, investors are liable to pay the daily interest charge. This quickly mounts up and almost always ends up badly for investors.
For every four investors that use a CFD facility, around 3 investors will lose money. When 65%-80% of investors are losing money using CFDs, the risks become very clear. In any case, even if the statistics were not so grim, CFDs are totally haram for Muslims to use (we’ve covered this in a separate article in more depth)
P.S If you enjoy learning about the stock market and want to learn how to trade on the stock market, consider signing up to the 30 Day Trading Programme. The programme is free and you can learn at your own pace.
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