How Does Trading 212 Make Money
This is a very common question for investors who have just signed up and one you have no doubt asked yourself. I know I did!
It just seems too good to be true that they can offer commission-free trading when other well-established companies are charging upwards of £7.99 per trade.
It has been said that each trade costs around £1 so those companies out there charging £7.99 and up are making a killing just from trades alone.
So how on earth does Trading 212 make money you ask. Well, they make money on the CFD side of the business.
You have no doubt seen this section in your app next to the Invest and ISA options. Be warned, stay away unless you know what you are doing.
Here is a quote from Ivan of Trading 212
“Trading 212 is making money from its CFD business where the main revenue comes from spread and interest swap.
As our Invest service grows, we will be able to monetise some of its advanced features but monetisation is not our priority at the moment. Our top priority is to provide an insanely great service, completely free.
Other platforms claiming to offer free trading either provide a significantly inferior service (e.g. the free trades are not instant but executed at the end of the day) or are limiting the number of free trades. And all of them are burning VC money.
We have been profitable for the last 15 years (if that is of concern for the long-term investor).”
As Ivan states long term they will likely add more premium features that they can charge for. For now, I think the features are more than enough for most but who knows what they may bring in the future. I know what you are thinking what is the CFD business?
Now that how does Trading 212 make money has been answered I know your next question.
Trading 212 CFD vs Invest and what is the CFD are normally the next questions I get.
What Is Trading 212 CFD
What on earth is CFD!
CFD is an acronym that is short for Contract For Difference. They can get pretty complicated but let us try and keep it simple for you (and me).
A CFD is a form of trading that is leveraged. You can trade shares, commodities forex etc. Think of leverage of how many times you multiply your deposit and therefore potential gains or losses.
Lets just use shares as an example as that is what we do here!
A Contract For Difference could be taken out on the speculation that Amazon share price will rise or fall. Now because it is leveraged it means we need only to deposit a small amount of money. As opposed to buying full-shares (this would be very expensive in Amazon’s case).
We are not actually buying the share in the case of CFD but betting on the share price going up or down effectively.
You must remember that the leverage works both ways though. Yes, you can magnify your gains as if you put a lot more money down, but your loss is also magnified should it not go your way.
There is a practice account on the CFD just as there is for the Invest side. I highly suggest you play around in there so get a feel for it.
Even if you do feel confident in what you are doing I would stay well away. Start very small and only with money you can afford to lose if you do decide to have a go. If you are still not convinced of how careful you need to be, then just look at this.
This quote again directly from Trading 212 as a disclaimer they have to provide us with is shocking, to say the least.
“CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.”
No that is not a typo, a massive 76% of retail investors lose money by messing around with CFDs when they do no understand what they are doing.
What makes you think you are so different? CFDs are for serious traders not retail or new investors. That’s how you lose money for sure. Trading 212 cfd vs invest are very different beasts.
Can I Lose All My Money With A CFD
Luckily Trading 212 will only allow you to lose what you have in your account. They will hold back some of your deposit should the CFD not go your way.
Seriously have a play around in the practice mode. I do from time to time. You can see the leverage in action there. I shall give an example, to take out a CFD on 1 share of Amazon (buy or sell) at the current exchange rate is £108.98.
If I wanted to buy that same share in my Invest or ISA account it would cost me a whopping £2178. That is leverage in action. The CFD allows us to magnify our capital by around 20 times in this case.
Using leverage means even small movements in the stocks price, typical of more established companies such as Amazon can be taken advantage of without the need for extremely large amounts of capital to start with. Please remember again though, the loss is also magnified!
When taking out a Contract For Difference with Trading 212 they do allow you to set a Take Profit amount and a Stop Loss amount. I highly suggest you make use of these if you take the plunge.
Personally I am happy with my long term dividend investing strategy although I do see the appeal to those who are willing and able to learn he CFD side of things.
It verges much more on the side of straight gambling in my opinion as opposed to the long game or traditional investing.
No doubt huge gains can be had by those who pay due diligence. As stated though those that do not pay diligence do so at your peril.
Hopefully, this did not terrify you but did at least make you aware of how easy it is to lose money on the Contract For Difference Side of things. Also, it is now clear how Trading 212 makes money when 76% of Retail investors are losing money when taking out CFDs.
Stick To The Invest or ISA Accounts
In conclusion and reiterate my point one final time. Stay within the Invest and ISA accounts unless you are prepared to lose the money deposit in the CDF side of things. That should clear up your concerns on Trading 212 cfd vs invest.
If you just want to throw £20 in a have a play then that’s fine. Do not go throwing large amounts in trying to make a quick buck, it will more than likely end in disaster for you.
As you can see Trading 212 CFD vs Invest are two entirely different things. CFD is more akin to short term gambling while ISA or Invest account is a long play.
Grab a copy of my Dividend Investing SpreadSheet to help track your portfolio and dividend income.
Here are some of must-reads books on investing and personal finance as well.
Hopefully, that answers your questions and concerns on how does Trading 212 make money. More so than this I hope it gives you some insight into CFDs and how it’s probably best to stay away for now if you are new to investing.
If you are looking for a Trading 212 alternative then have a read of my Freetrade vs Trading 212 post. It is the only real alternative that offers zero fee investing.
Trading 212 Fees
If you stick to Invest or ISA accounts then you will not have any fees to deal with. There is a small stamp duty tax but that is a government set thing, something Trading 212 has to do.
Trading 212 CFD will have fees associated with it though, as well as the ability to loose money quickly. They make money on the spread as well as any loss you incur. Tread carefully.
Take advantage of the fee-free trading on the Invest and ISA accounts and stay away from the CFD account unless you know exactly what you are doing.
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None of the above should be used as financial advice, I am not a professional. Always do your own research.