Traditional wealth managers are facing increased pressure from new rival trading apps that are enticing younger savers with commission-free share dealing.
These dealing apps promise a ‘fee-free’ approach, with no charges for buying and selling shares, exchange traded funds (ETFs) or investment trusts. This contrasts to other well-established investment platforms that charge up to £12 to buy and sell shares (although the price falls to as low as £1.50 when placing regular trades).
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It means the cost of investing is brought down significantly for savers who are new to investing. These newer platforms also allow customers to buy fractional shares in companies, meaning savers can buy a small stake for as little as a couple of pounds.
Enthusiastic users of these apps say it has introduced them to low-cost investing at a time when interest rates offered by bank savings accounts are at rock bottom. But critics are concerned the cheap cost of trading encourages users to take a short-term approach by making it too easy to buy and sell shares in quick response to what is going on in the wider stock market.
Others argue the apps are encouraging users to treat investing like gambling. Some offer access to controversial contracts for difference trading products (CFDs), which allow users to speculate on investments rising or falling in value. The UK’s financial regulator, the Financial Conduct Authority (FCA), has warned an overwhelming 80 per cent of customers lose money in the CFD market.
Martin Bamford, a chartered financial planner and the founder of creative agency Bamford Media, said: “Cheap stock trading apps have fuelled a massive increase in new investor activity in the past year. It’s fantastic to see younger investors enter the markets and gain some valuable experience. But many are influenced by the dream of becoming a stock trading millionaire.
“In the past year, it’s been easy to make money in the markets with no skill required, as markets have been on a bull run following their initial wobble at the start of the coronavirus pandemic. But succeeding in the longer-term will necessitate going back to basics, ignoring the day-to-day market movements, and linking investment goals to your overall financial plan.”
It’s worth pointing out the apps aren’t completely free. Some charge a monthly fee to hold an Isa, while underlying fund charges are likely to still apply. This is what fund managers charge annually to cover their costs.
But there’s no doubt these apps have caught the attention of both young savers and more seasoned investors who are attracted by the low execution costs of these trading apps.
Below we list the main players and explain how they work.
Freetrade, which launched in October 2018, offers access to more than 4,000 shares, ETFs and investment trusts. However, it does not offer access to open-ended funds – a key part of many investors’ portfolios. The app has more than 340,000 users, with around 85 per cent of those having signed up over the past year.
Freetrade is regulated by the FCA and is fully covered by the Financial Services Compensation Scheme (FSCS). This means if the company were to go bust, customers’ money would be protected up to the value of £85,000.
A basic account is free while an Isa costs £3 a month. Freetrade also offers a Sipp at £9.99 and a premium account costing £9.99 a month, which offers a wider range of investments such as FTSE Aim all-share stocks. The premium account also pays interest of 3 per cent on uninvested cash.
There are no commissions for placing instant trades and there is no limit to how many can be placed each month. However, the company charges a foreign exchange rate of 0.45 per cent on investments that are not priced in pound sterling.
Under HMRC rules, stamp duty of 0.5 per cent is charged on purchases of shares in a UK company.
Trading212 launched in June 2017 and claims its app has been downloaded 14 million times by users across Europe.
Similar to Freetrade, it offers a range of more than 10,000 stocks and ETFs and doesn’t offer access to open-ended funds. The company doesn’t charge any trading or currency fees (aside from stamp duty).
Trading212 also offers access to high-risk CFDs. Through CFDs, users are able to speculate on the price of cryptocurrencies, commodities such as gold, and the stock price of individual companies. However, its website states that 76 per cent of its customers who invest in CFDs lose money. Trading212 was originally founded in Bulgaria in 2004, concentrating on CFD trading, before branching out to commission-free stock trading in the UK four years ago.
The company, which is based in Bulgaria but has an office in the UK, says it is regulated by the FCA and is FSCS registered, protecting customers’ deposits up to the value of £85,000 per individual.
EToro is another platform offering zero commission for UK investors purchasing stocks and ETFs. However, it is a US dollar-denominated platform and applies a currency conversion charge starting from 0.5 per cent to deposits not made in US dollars. This currency fee is waived for customers who invest at least $50,000 through the platform.
Founded in the US in 2007, the company now has 17 million users and five million of those signed up last year.
It offers a broader range of investments than Freetrade and Trading212. Like Trading212, it also offers high-risk CFDs where a large percentage of investors lose money.
For people who want to buy shares through eToro, the minimum deposit is $200 and a minimum of $50 has to be paid per stock. The company does not yet offer an Isa product. EToro is regulated by the FCA and covered by the FSCS.
Robinhood is the original low-cost trading app that shook up the US investment market when it launched in 2015.
The company had planned to launch in the UK last year, but this has now been “indefinitely postponed” as the firm focuses on its home market. Robinhood is facing scrutiny by US politicians and is under pressure to improve safeguards on its app after the apparent suicide of one its young users.
Tom Shepherd, 34, is a lecturer in global health at Keele University. He lives in Cheshire with his partner and their newborn baby.
At the start of the pandemic, the pair decided to rethink their spending habits and to save more money. Shepherd began investing three years ago when he signed up to Freetrade. He takes along-term approach to investing, choosing a mix of quality companies and a few more exciting ones that have excelled during the pandemic.
He pays into a stocks and shares Isa with Freetrade, paying £3 a month. This gives him unlimited access to commission-free trades and meant he could pay in small amounts when he first started investing. He now drip-feeds money into his investing account, although he has maxed out his Isa allowance of £20,000 for the current tax year so is not able to pay in any more money until April.
He invests in a range of individual companies. These include gold miner Greatland Gold, electric car maker Tesla, US insurance firm Lemonade and space company Virgin Galactic.
Shepherd holds no other investment accounts, although he does pay into a workplace pension that invests on his behalf. He accepts that investing solely in individual companies is a risky investment strategy but says he does extensive research before putting money in. He has no plans to withdraw the money any time soon.
“I used to invest in tracker funds, which pool savers’ money to invest in a broad range of companies. The more you diversify, the lower the risk. But it also means potential gains are diluted. I’m happy with the risk I’m taking,” he says.