and What is Options Trading?
We all see the news telling us that the stock markets moved either up or down and what the USDollar is worth and more. But what does it mean and how do you bennifit form it?
We all see the news telling us that the stock markets moved either up or down and what the USDollar is worth and more. But what does it mean and how do you bennifit form it?
You bennifit from the ups and downs by trading, but what is trading and how do you do it. In simple terms, trading is the process whereby we buy a share or a currency on a market (such as the ASX or NASDAQ), and then sell them later for a higher price. When explained like this it makes a lot of sense and is probably the main reason why people generally think that trading is easy money. But in fact trading is the hardest way to make easy money.
Can I trade quickly?
Yes you can, trading can take place over a wide variety of time frames. And what you call quick could also be slow to someone else.
Some people will trade with short term trades to as low as minutes or hours, and others will make trades that last over weeks and months. The basic skills required are no different for the different trading length and the reason why people choose a time frame is because it's all about what suits you best.
Trading can be a very exciting and worthwhile endeavour and there are attractions for most people (not including ‘making money’ which is obvious). Typically people who enjoy trading and are successful find it to be either a passionate hobby or a job, as it needs a high level of commitment to follow what has happened, what is currently happening and what is expected to happy. Before you can make consistent profitable trades over any period.
How can I trade and profit if the markets going down?
The financial product that we buy and sell may be shares in a company, a futures contract related to a commodity, or even a foreign currency, for example, and as we typically trade as the market goes up we know that the market will go down.
Many people don’t know that many markets offer the opportunity to take advantage of a falling price as well. This is often referred to as trading ‘short’, as opposed to the buying low then selling high, you sell high then buy low.
As falling markets move quicker than rising markets this can be a very successful trading strategy once you have developed your short trading strategy and can build significant wealth in a matter of days.
Advantages of trading include:
- Self employed – you are your own boss, and you can trade the market that best suits you
- Geographical freedom – technological advances are making this easier every day, with trading on your phone you can trade the worlds markets
- Minimal capital outlay – compare this with purchasing a franchise or establishing a new retail store, with only a few thousand dollars and the use of a CFD account you can leverage your money into major trades for major success
- Unlimited potential for profit – financial freedom is what most traders aim for
- Flexibility with time – you choose when you trade and when you don’t
- Almost anyone can do it – if you are 18 or older you can open your own CFD account or stock account, and start trading
Disadvantages of trading:
- No guaranteed success – many people don’t make money trading, you need to understand what you are doing before you start risking your capital
- Can be stressful and emotional – when you are ‘playing’ with your own money, this is almost inevitable
- Solitary existence – trading can be a very lonely profession, you need to plan on managing this
- Takes time – like many endeavours, consistently profitable trading takes time. We all stumble on a win from time to time, but long term consistent success takes time and work
What are trading markets and why do we need markets to trade?
Markets facilitate trading, they are established in most developed countries and emerging countries and have existed for many 100s of years. Furthermore, markets are now vital parts of the corporate world as they create ways for companies to be easily brought and sold, traded and valued.
Markets are a vital part of the corporate world and exist to serve two general purposes.
First, they allow the bringing of buyers and sellers together in an efficient and controlled manner. It therefore channels capital resources to those who will make the best use of them, as people only want to invest in a company that will give them the best return.
The second purpose of markets (moreso for derivative and foreign exchange / currency markets) is for the management of risk. Markets enable people to reduce their risk or increase the risk level in the interest of high levels if reward. We all have been told to diversify, this does not just mean the companies we invest in but also the types of risk as we can't be all in high risk investment. As some people trade stocks for dividends income or capital growth.
When we trade stocks, what are we trading?
When we speak of people buying stocks we mean that an individual can invest some of their own money into a company along with many others. We would do this by purchasing stock (or shares) in the company.
Stock is an equity security in that it represents the basic unit of ownership in a company. When you buy stock, you become a part owner of the company and therefore share in its profits and losses, and you also have a vote in the running if the company.
One benefit of owning stock is receiving dividends and the other is from the capital gain you can make. Stock prices fluctuate on a daily basis according to the supply and demand for that stock and you are able to benefit from a rising price and selling the stock for higher than what you purchased.
Having access to stock markets and being able to invest in traded companies, you should ideally earn the best rate of return when investing in a company listed on the stock market.
What are derivatives and future, and can they be traded?
Trading futures, options or derivatives is a level of trading beyond stocks where what you trade is not as clear, and success and profit can be made by a stock price staying still.
The derivative markets allow for large companies who have a risk exposure in the future to hedge and protect themselves against an adverse move in the price of something. Such as a major shift in a commodity price.
These markets are very actively traded and includes trading between large banks, central banks, governments, and other financial markets and institutions.
Individual traders will also trade these large markets and are known as speculators. This is not the type of trading that you should plan to start with. But speculative trading is something to consider once you have developed your base level of trading skills.
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