Should beginner investors pick Trading 212 as their online broker in 2022?
Choosing a brokerage is the first important prerequisite to start investing into the stock market. As explained in our beginners guide to stock order types a brokerage is an intermediary between the buyer and seller of a stock.
In Europe there is a large number of brokers to choose from. Some distinguish themselves by offering their customers to purchase stocks with low or no commissions while others stand out with beginner-friendly, easy-to-use mobile apps. This post takes a deeper look at Trading 212 which can be considered one of the most user-friendly brokerages currently available in Europe.
Trading 212 could be considered the Europan equivalent to Robinhood. They stand out as they offer commission-free buying and selling of stocks and exchange-traded funds (ETF). In addition they offer a beginner-friendly and easy-to-use mobile app which significantly lowers the entry burden for beginner investors.
Trading 212 has seen huge growth over the last year, mainly as a result of the 2020 stock market rally and the meme stock growth at the beginning of 2021. They‘re growth has been so big that they temporarily had to restrict new users from signing up although they recently started onboarding new users again.
The company is based in the United Kingdom, Cyprus and Bulgaria and is regulated by the UK Financial Conduct Authority (FCA), Cyprus Securities and Exchange Commission (CySec) and the Bulgarian Financial Supervision Commission (FSC). Account funds are secured up to 20,000€ per user and Trading 212 provides its users with an free private insurance which covers an additional 1 million Euros in case Trading 212 goes insolvent. Whike not impossible, it is unlikely that Trading 212 will go bankrupt.
One often misunderstood point is that the 20,000€ coverage only covers funds kept in a Trading 212 account but not any securities kept there. While Trading 212 keeps purchased stocks and securities in their accounts they belong to the user once purchased and as such are not impacted in case Trading 212 goes insolvent.
While commission-free trading sounds good at first it brings up the question how Trading 212 makes money. Trading 212 mostly makes money using fees from their CFD business (which is not covered in this post) as well as some smaller fees. Overall their fees are still quite low compared to competitors.
When setting up an account with Trading 212 the user chooses a base currency for the account which usually corresponds to the users local currency. However not all stocks and securities are being offered in the users base currency. In those cases Trading 212 charges a 0.15% currency conversion fee when placing a buy order for a security other than the accounts base currency. The same fee is also charged when receiving dividends in a currency other than your accounts base currency.
For example when you have created your account with Euro as the base currency and want to place a buy order for a stock traded in USD you have to pay the fee on the total value of your purchase. The same applies when you later sell the shares again which causes the value to be converted back to your base currency for which you again pay the 0.15% currency conversion fee. As a result the total currency conversion fee paid equals 0.3% for buying and selling your shares.
The buy and sell price usually are not exactly the same price and there is a small difference between them. This difference is called a spread. Trading 212 makes money with each transaction with this spread between the buy and sell price.
When other traders or banks short-sell a stock they have to lend shares from other investors in order to resell them later. Trading 212 lends shares of their users to those short-sellers and in return receive a fee for lending out the stock.
While users cannot opt out of securities lending they can see what percentage of their shares is being lend out via the Trading 212 app.
Trading 212 does not charge fees for the first 2000€ deposited into the users account. This amount can be deposited in multiple charges and there is no fee before reaching the 2000€ threshold. However afterwards Trading 212 charges a 0.7% feed on each transaction done with payment methods other than SEPA bank transfers.
Trading 212 offers a free virtual account which can be used to practice investing using virtual money. This is a great offer for beginners who first want to try investing without putting their own capital at risk. By offering this free virtual account Trading 212 underscores their commitment to making investing more accessible for beginners.
Like many other brokers Trading 212 offers a watchlist to keep track of stocks and securities a user wants to follow. These followed companies are displayed prominently on the Home Screen of the Trading 212 app.
One big drawback of their watchlist functionality is the current 40 stocks per watchlist limit. As a result a user can quickly outgrow one single watchlist if they want to follow more than 40 companies. This can be circumvented by splitting their watchlist into multiple watchlists. One approach would be to splitting the list by followed sectors, e.g. there could be a list for Aviation and Aerospace, for Consumer Goods and for Tech companies.
The Trading 212 offers a detailed portfolio overview which lists each indivual holding with the currently achieved profit or loss. In addition it also has one main graph showing the overall portfolio performance.
While the search functionality of Trading 212 usually offers good results when searching for company names, searching for ticker symbols can sometimes bring up completely unrelated results. When using the search the limited selection of stocks also becomes visible. While most of the big and well-known companies are available in Trading 212 companies from smaller stock markets as well as companies with a smaller market cap are usually absent.
One recent addition to Trading 212 is the pies feature which allows their users to setup automated investment plans which invest a predefined amount in a given interval. Users can easily create their pie by selecting companies that will be included and providing the percentage of the overall pie that these companies should occupy. The pie feature can automatically reinvest dividends from companies that are included in the pie.
The app shows the projected growth of the pie value over time and lets the user set a investment goal. This growth is based on the previous growth rate of the included stocks and securities. However the growth not guaranteed as the change in value of stocks cannot be accurately predicted and past performance is not indicating future performance of an investment.
Trading 212 also offers a marketplace for copying pies from other Trading 212 users.
Like Interactive Brokers Trading 212 offers the opportunity to buy fractional ownership of a stock or ETF. This means that rather than purchasing a full share of a stock or ETF a fraction of a share is being bought. This allows Trading 212 users on a tighter budget to slowly build up their holdings in the security. If the security emits a dividend it is being shared between the owner of the share.
For example if one share of a company costs 100€ the user can buy 0.5 shares of the company for 50€. If the company later pays a dividend of 10€ they will receive 5€ which equals 0.5 times the amount paid per full share.
As of April 2022 the Trading 212 mobile app has a 4.5/5 stars rating in the Apple App Store with ~15,500 total ratings. The app has a total ranking of 3.8/5 stars with a total number of 108,000 ratings in the Google Play Store
Customers like the following aspects of the Trading 212 mobile app:
At the same time the following aspects are generally rated negatively:
For Europeans there is a large number of brokers of varying quality and costs available to pick from. They usually can be divided into brokerage platforms provided by many banks, dedicated professional brokerages like Interactive Brokers or Degiro and retail investor focused trading apps like eToro, Trade Republic, Free Trade or Scalable Capital.
Learn more about fundamental investing concepts in this recommended post.