This is not going to be a Freetrade review like any others you have read. I must confess to being somewhat of a Freetrade evangelist, although I’ll definitely highlight some flaws with the platform.
How I Discovered Freetrade
I have always wanted to invest in the stock market. Buy low, sell high – how difficult could that be? My grandmother – a doctor with a very frugal approach to money – had held a stock portfolio for decades that served her well in later life.
What always held me back was the fact that I never had much to invest to absorb any broker transaction fees. I heard about Robinhood in the US which allowed fee-free investing of any amount, but they were not available in the UK.
On the Monzo forum however, I heard about a startup trying to achieve a similar thing in the UK. Freetrade at that point had a waiting list. I signed up eagerly and got through relatively quickly. My first trades were about £20 of shares in some big UK companies. At the time Freetrade only let you access a few hundred stocks from the FTSE 100 and 250, plus some ETFs. Today I have thousands invested into much more recent additions to the app – mainly US tech startups.
It has been fascinating to watch Freetrade grow. Like many startups that raise their initial capital on Crowdcube – a marketplace for investing in very early stage companies – they maintained a very open product roadmap, actively listened to feedback and held regular events.
At these events I have met and maintained regular contact with their founder, Adam Dodds, formerly an accountant at KPMG and CMO Victor Nebahau, a Google alumnus. It turned out their very reason for launch was wanting an app like Robinhood only to find the US success story consistently failed in its plans to open in the UK.
Soon enough, Freetrade returned to Crowdcube for another investment round and it is only right that I make it clear I put a sizeable amount of my wages into that round. So again I may be a little too proud of Freetrade, but read on to learn more about my extensive experience of using the Freetrade app.
At the time of writing, Freetrade do not currently offer a Lifetime ISA. If you’re not aware this is a very beneficial scheme where you can pay in up to £4000 each year and receive an extra 25% from the Government – so up to £1000 per year which you can then invest. Because Freetrade didn’t offer it I had to choose between AJ Bell and Hargreaves Lansdown. I went for Hargreaves Lansdown as they offer free trades on funds, which at the time I saw as a better way to diversify £5000, but have come to regret that choice. As such this Freetrade review compares Freetrade against its established competitor.
While the Freetrade app has changed a lot over time, one thing that hasn’t changed is their convention of stock descriptions. These are often very comical like “slow internet” for telecoms giant BT.
A positive change has been the price of transactions. It used to be that Freetrade was indeed free if you were happy to wait until 4pm. But if you wanted an instant order it would cost you £1. As more US stocks joined this became more limited.
Buying or selling a UK stock at 4pm meant the transaction would go through not long before the closing bell. But as the US markets open in the early afternoon due to different timezones, 4pm UK time didn’t give you much of a chance to see where the market was heading that day.
Some investors would argue that with investing for the long term it doesn’t really matter when you make your trade.
This became more limited when due to demand Freetrade started shifted the deadline to 3pm. As the US markets would open at 2.30pm at that became more tight. If you were more of a short-term trader then you had to assess everything at the open and make your decision quick. Of course you could have just paid the pound.
Soon after, Freetrade made all trades free. That was amazing and suddenly you could buy or sell at any time.
So how does Freetrade make money and what are the costs involved? If you have an ISA then they charge £3 a month. If you keep cash in your account then they also earn interest on that – which sounds shady but is actually very common in the industry. In terms of costs there is a foreign exchange fee when buying US stocks but they don’t actually make a profit on this last I heard.
More recently Freetrade have also brought out their exciting new feature of fractional shares. That means if you want to invest in Amazon, but don’t want to pay the $2000+ for a single share you can invest what you like and receive the equivalent fraction of that share. That means investors without much to invest can easily develop a diversified portfolio across big expensive stocks like Google, Amazon and Tesla. This isn’t so much of an issue for the UK market as shares are much cheaper, but I personally much prefer US tech titans over FTSE heavyweights that issue big dividends without offering much capital gain.
So how do you get started with Freetrade? Download the app and fill in your details. Freetrade uses email to securely log you in. Normally touch ID or passcode works fine but first – or if you do not use the app for a long time or change device – its and email link.
To buy US stocks you need to complete a W8-BEN form, which just declares that you are not a US citizen for tax purposes. This used to be a form you had to mail to your broker. More recently most brokers have made this much simpler and digital. With Freetrade it takes seconds.
To add money to your Freetrade account you just use a bank transfer to the details they provide. A lot of fintechs let you top up within the app but this is actually very expensive for the company. A bank transfer is nice and simple and cheap. Make sure to include the reference they provide so that your top up gets matched to your account. If you run into any issues Freetrade’s customer support are responsive and helpful. Normally a bank transfer goes through in just a couple of hours.
With cash in your account you are ready to start investing. The discover tab shows you all the stocks available. I would recommend selecting your favourites and adding them to a watch list.
Now Freetrade’s downfall, at least for the time being, is a lack of analysis of stocks. The graph itself is pretty poor. I use a combination of Yahoo Finance and an app called Simply Wall Street to try and get an idea of how a company is performing.
Not understanding this cost me badly when I started investing. Of that £20 of first stocks I bought, Thomas Cook was one of the names I went for. I had read about Value Investing and how Warren Buffet had built his empire on finding companies that had fallen on hard times and then profiting from their recovery. Thomas Cook appeared as one of those to me – a historic brand with lots of high street stores and its own airline. I could see how its price had toppled and thought a recovery could see me win big. I increased by holding. Over the next few months I watched the price fall further and further until I finally received an in-app message from support that Thomas Cook had gone bankrupt – ceasing all trading of its shares – and my pitiful remaining funds in the stock would soon disappear. That was my first 100% loss.
So what did I learn from that? Even big established companies can have problems – particularly with debt. Now I still hold companies with a fair amount of debt – but these are normally new ventures using borrowing to accelerate their growth. But companies that keep borrowing to prop themselves up when they are failing as a business are to be avoided. A company’s debt pile is easy to see if you can read balance sheets but is even easier with a handy chart such as those provided by Simply Wall Street.
Freetrade has none of these analytics as yet and so you need to go away and do extensive research. That can be a little clunky. Why? Because Freetrade only has a limited number of stocks. The list is growing all the time and by the time you read this may even be very extensive. But currently you have to find the stocks you think are good opportunities and then see if they are available on Freetrade. In general I find I go through Freetrade and look for stocks that have shown growth (I am very much a growth-oriented investor as 30% capital gain in a year means more to me than a 5% dividend) and then research them.
That was a minor perk of having my Lifetime ISA with Hargreaves Lansdown. They have a huge number of stocks available – in fact it is difficult to find stocks they don’t offer. These are accompanied by various methods of analysis – from PE ratios to broker forecasts (a simple “buy”, “hold” or “avoid” type approach) and news.
However, trades would go into a queue and not actually go through until a day later so you are not guaranteed a price. Then of course with stocks you have to pay more than £10 for the transaction. That may sound manageable if you have a few hundred to put on a single stock, but I have also had failures in my LISA. I bought into a Canadian medical cannabis company called Organigram and have watched 80% of my investment disappear.
My portfolio is up significantly overall, but it is a shame that to get what remains of my money back from that particular holding means paying a price that will take a big chunk out of the already reduced holding. My usual approach would be to continue holding as I don’t need the money – but the Lifetime ISA rules specify that the money can only be withdrawn for a house or retirement. With Freetrade at least if I did want to withdraw my last £20 from Thomas Cook before it stopped trading I could have done so without incurring a fee.