Trading by small investors has surged to levels not seen since the dotcom boom in 2000, with thousands buying into the stock market rally that has pushed the FTSE 100 above 5,000 despite falls last week. Brokers say day trading has been one of the biggest beneficiaries, with a threefold increase in those dealing more than 30 times a quarter.

TD Waterhouse, the broker, reported record levels of internet trading in August, as markets rose. Angus Rigby, chief executive, said: “Market volatility has provided both opportunity and risk for investors this year, if they timed their trades well.”

First-time investors need to tread carefully, though, as short-term trading is notoriously risky. Here we offer a bluffer’s guide to day trading:

What is day trading?

Day trading, or active trading, allows investors to buy and sell shares and other investments at short notice. The technique tends to outperform in volatile markets, as there are usually more price fluctuations.

Alternatively, there are vehicles such as contracts for difference or spread betting, which allow you to bet on market indexes, shares, commodities, currencies and bonds without buying the underlying asset — attractive if you want to get in and out fast.

With CFDs, you put up a deposit, usually 10%-20%, and your broker lends the rest, which allows for big gains but also means you can lose more than your stake. CFDs and spread betting are exempt from stamp duty and, as spread betting is classified as gambling, profits are free of capital gains and income tax.

How do I get started?

Ten years ago, buying and selling shares, usually through old-fashioned stockbrokers, was costly. However, a recent innovation, called direct market access, removes the middle man almost completely. To get started, you need a broadband internet connection and a broker. Adrian Lowcock at Bestinvest said websites such as etrade.co.uk and selftrade.co.uk offer frequent-trader rates, which reduce transaction costs.

If you want to pay per trade, Interactive Investor, at iii.co.uk, is the cheapest online platform. It charges a flat fee of £10 for each deal on UK stocks and £15 for US and European stocks. There are no registration fees or account management charges. Rebecca O’Keefe, head of investment at the firm, said it had seen a fivefold year-on-year increase in trading activity in August.

Do I need a strategy?

Experts advise taking dummy runs on fantasy trading platforms such as bullbearings.co.uk. Keith Bowman at Hargreaves Lansdown, the adviser, said: “Research is key so you should continue these dummy runs to become accustomed to different scenarios in the market.”

Many experienced day traders know they cannot double their money in a couple of trades but build up their knowledge of what works and then use that technique repeatedly, making a little profit each time.

One of the keys to successful trading is knowing when to sell. You should set yourself a realistic price target — and stick to it. “Traders must be clear about what they are aiming for and never invest more than they could afford to lose. After all, spread betting is ultimately gambling and can become very addictive,” said Lowcock.

He said investors should always consider stop-losses, particularly on CFDs and spread betting, to lock in profits and minimise the risk of substantial losses. A stop-loss is an instruction to sell your shares automatically if the price falls to — or below — a certain level in a specified time.

Which are the best websites?

You can use the web to profit from the experiences of other traders at financial advice websites such as fool.co.uk and even on Twitter, the social networking site.

Stocktwits.com allows traders to track discussions and stock trends on Twitter and lets them “tweet” their opinions of a particular stock. Of the 90,000 users signed up to the site, only about 15,000 actively contribute, while the rest listen in. The site’s founders say the forum is popular with traders who lost their jobs in the recession but want to keep their hand in.

Bowman said technical analysis and charts are useful to anticipate share-price movements. He recommends sharescope.co.uk. For investors on the move, timetotrade.eu has an alert facility that sends you a text or e-mail when a share price breaks from a defined trend line. Users can monitor up to five free alerts at a time, or pay £19.99 a month for unlimited alerts.

‘I don’t look for frenzied stocks’

Adam Al-kashi (pictured above) started day trading in 2000, while at university. The 30-year-old medical research fellow, from Twickenham, southwest London, said: “I started trading without really knowing what I was doing — I’d watch my stocks rise for two weeks and then crash back down.”

He came out of the market but started trading again last year. He uses his account with TD Waterhouse, the stockbroker, to buy and sell most days, but perfects his technique on virtual platforms such as bullbearings.co.uk.

“I don’t look for frenzied stocks that everyone’s buying — I use charts to find ones that are picking up. I also use stop losses now, which I never used to,” he said.

Best of the web

• etrade.co.uk
• selftrade.co.uk
• iii.co.uk
• bullbearings.co.uk
• fool.co.uk
• stocktwits.com
• sharescope.co.uk
• timetotrade.eu

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