Information, cost and position size: the first three rules every private investor needs to understand
Before you click buy, three structural disadvantages have already been set against you: information, cost and position size. The Street Smart series explains the mechanics.
A Bloomberg terminal costs around £25,000 a year. Fund managers, brokers and market makers have one on every desk. Most private investors do not. That gap in data access shapes every trade you make before you place a single order. The Street Smart Trader identifies three rules to help close this gap. They will not give you a Bloomberg terminal. But they will stop you trading as if you already had one.
The information gap that works against you
Every market has two sides. On one side sit fund managers, hedge funds, trading desks and market makers. They have faster data feeds, better analytical tools and dedicated research teams. A private investor working from a standard retail brokerage account starts every trade at a disadvantage on each of those fronts.
This is not a reason to avoid markets. It is a reason to be deliberate about when and how you enter them. The professionals are not smarter. They are better equipped. Understanding that distinction is the foundation of everything else in this post.
The first rule is to know what information you have and what you do not. A private investor can access end-of-day price data, company filings, regulatory announcements and broker research. That is enough to make informed decisions on most stocks. What you will not have is real-time institutional order flow or any sense of what the large desks are positioning for. Trading as though you do have those things is where most retail losses begin.
The practical application of Rule 1 is simple. Before entering any trade, ask what information the decision rests on. If the answer is a news headline that has been public for 24 hours, that information is already priced in. The market moved the moment it was released. You are not trading on an edge. You are paying for someone else’s edge to close.
Stick to situations where your research is specific and recent. A company announcement read and understood on the morning it is released is useful information. A six-month-old broker note is not. The discipline to separate fresh data from stale data is one of the clearest differences between experienced and inexperienced retail traders.
Professional participants also have what is sometimes called news velocity: the ability to process and act on information within seconds of it being released. A private investor will rarely beat that. Where a private investor can compete is in analysis depth. Smaller companies with limited analyst coverage are one example. A niche sector or a company-specific catalyst that does not move the wider index is another. These are areas where a careful private investor reading primary sources can develop a real edge.
Why the spread matters more than most people realise
Every stock has two prices: the price you can buy at and the price you can sell at. The gap between them is the spread. On a large FTSE 100 stock, the spread might be a fraction of a penny. On a smaller AIM-listed company, it can be several pence. That difference is a real cost on every trade, and most retail traders underestimate it significantly.
Take a stock priced at 100p to buy and 96p to sell. The moment you buy, you are already 4p in the red. The stock has to move 4p just for you to break even. On a £5,000 position, that is £200 lost before you have waited a single day. Our explainer on the bid-offer spread and what it costs retail investors covers the full mechanics.
The spread is not the only transaction cost. Stamp duty at 0.5% applies on UK share purchases. Broker commission adds up across a year of active trading, even at low-cost platforms. These costs are real. They are deducted from your return before any gain is counted.
Rule 2 follows directly: never trade a spread you have not calculated. Before entering a position, note the current bid and ask prices. Work out the spread as a percentage of the mid-price. If it is above 2%, ask whether your expected return justifies that cost. On stocks with wide spreads, you need a proportionally larger move to profit. Many trades that look attractive on paper fail this test once the spread is included.
Volume-Weighted Average Price, or VWAP, is worth understanding here. VWAP measures the average price at which a stock has traded through the day, weighted by volume. Institutional desks use it to execute large orders efficiently. For a private investor, the practical lesson is narrower. Prices during the first and last 30 minutes of the trading session tend to be noisier and spreads tend to be wider. Executing trades in the mid-session, when volume is steadier, typically gives a better fill price. It is a small edge, but it is a reliable one.
Position size: the rule that keeps losses manageable
Rule 3 is position sizing. It is the rule most likely to save your portfolio when things go wrong. A private investor who sizes positions well can absorb a run of losses and keep trading. One who does not can be wiped out by a single bad trade, even when the overall approach is sound.
The principle is clear. Never risk more than you can afford to lose on a single position. Most experienced private investors work to a rule of 1% to 2% of total portfolio value per trade. On a £20,000 portfolio, that means risking no more than £200 to £400 on any single position.
Risking a set percentage does not mean limiting your holding to that amount. It means setting your stop-loss so that if the trade moves against you and you exit, the maximum loss sits within that percentage. Our post on how stop-loss orders work in practice explains the mechanics of setting them effectively.
Consider a concrete example. You buy Barclays at 230p. Your stop-loss is set at 215p, which is 15p below your entry. On a 1% risk rule with a £20,000 portfolio, your maximum loss is £200. Divide £200 by 15p and you get a position size of 1,333 shares. That is the correct size for this trade. Buying more means taking more risk than the rule allows.
Position sizing also protects you from the psychological trap of averaging down. When a trade moves against you, the temptation is to buy more at a lower price. This can work in limited circumstances. More often, it compounds losses. A strict position size rule removes that temptation. The position is defined at entry. The stop is set. The potential loss is known in advance. That clarity separates disciplined trading from guesswork.
Using the three rules as a pre-trade checklist
These three rules work best as a checklist before every trade. First: what information does this decision rest on, and is it genuinely current? Second: what is the spread on this stock, and does the expected move cover it? Third: what is the correct position size given my stop level and my portfolio risk rule?
Each question takes under a minute to answer. Together they filter out a significant proportion of trades that look attractive on the surface but fail on closer examination. A private investor who applies all three consistently will make fewer trades. But the ones they make will be better considered and better protected.
The Financial Conduct Authority publishes data on retail investor outcomes in leveraged products. The figures are stark: the majority of retail accounts lose money. Most of those losses are not explained by poor stock selection. They are explained by poor execution: acting on stale information, ignoring transaction costs and sizing positions in proportion to hope rather than risk. The FCA’s guidance on why retail investors lose money is worth reading alongside this post.
The three rules here address exactly those failure points. They do not require special software or a professional background. They require the discipline to do a small amount of calculation before every trade. That discipline, applied consistently, is worth considerably more than any shortcut. A private investor who knows their information edge and controls their position size is ahead of most. These are the habits that most retail participants never develop.
This post is drawn from The Street Smart Trader by Ian Lyall, adapted for Cristoniq readers. Money & Markets is a guide to financial concepts and market behaviour. It does not constitute financial advice. Always consider your own circumstances and consult a qualified adviser before making investment decisions.