Would you like to make
money from trading but don't know how to trade?
Have you heard of others making a killing on the markets and wished
yourself in their position?
Trading covers a multitude of sins, or at least a multitude of markets.
Mention “trading” to a non-trader and they’ll probably think of stock and
shares but there are many other markets you can trade in. These include
commodities, futures, indices, CFDs and options. They all have their pros
and cons and some require specialized knowledge.
The most popular markets used by traders are stocks, commodities, futures,
indices and forex. Some traders switch between markets, others stick to
just one. Let’s highlight some of the similarities and differences between
them.
Shares
In the USA there are over 40,000 shares so you have a lot of markets to
choose from. You can’t deal in all of them so you need to home in on those
that offer good trading opportunities using whatever trading methods you
decide to use.
When buying shares you usually have to put up all the money at the time of
sale. That might seem obvious but it’s not so with all markets. Some
brokers offer a 50% margin with shares which means you can trade to the
value of twice the amount in your account. This seems like a good deal but
if your shares start to go down you’ll get a “margin call” and will either
have to put more money in your account or sell the shares at a loss.
Shares are normally traded in lots of 100. If you want to trade an
expensive share – and some shares are very expensive, particularly in the
US markets – you need a considerable amount of money in your account.
It’s not easy to sell shares short. Selling short is a strange concept to
many people who think of buying shares at a low price and selling then at
a higher price. But it’s often easier to predict that a share will fall
rather than rise so what you’d like to do is to sell it at a high price
and then buy it back later at a low price. The net result is the same
whatever the order of the deals – buy low, sell high.
However, you can’t sell something you don’t own so in order to sell shares
short you must “borrow” them from your broker. This is not quite as
straightforward as buying and not all shares are available for selling
short.
Finally, share dealing takes place during market hours so if you don’t
live in the country where they are being traded you must adjust your
trading hours to suit.
Futures, commodities and
indices
Commodities are goods such as corn, copper, crude oil, orange juice, oats,
gold and wheat.
Technically, a futures contract is an agreement to make or accept delivery
of a commodity on a certain day at a certain price. In practice this
rarely happens unless you’re a manufacturer who actually wants the goods.
The vast majority of futures traders are simply speculating on whether the
price will go up or down and never take delivery of an item.
Futures contacts include commodities and also stock market indices such as
the S&P 500, Dow Jones and the Russell. Indices are simply a composite of
securities that provide an overall reading of the market or some section
of it.
The S&P 500 (Standard & Poor’s 500) tracks 500 of the largest companies in
the US market. The Dow Jones Industrial Average tracks only 30 of the
largest and longest-established companies while the Russell 2000 is an
index of smaller stocks.
Essentially, commodities and indices are futures and traded in much the
same way although traders may use the terms interchangeably.
Unlike shares, futures can be sold short just as easily as they can be
bought. Each futures contract has its own fluctuating price and many
traders deal in just one lot contracts.
Brokers usually charge a flat fee commission per contract, often expressed
as a “round turn” which is one buy and one sell transaction. This may be a
few dollars, often less than the value of a point or two on the contract.
If you’re trading a long time frame the commission is negligible but if
you’re day trading and scalping for a few points here and there it becomes
a considerable part of the cost.
Futures brokers usually offer a margin of around 20% of the value of the
underlying instrument so you can control $10,000’s worth of a contract for
maybe $2,000. However, the same rules apply – if you over-leverage your
account you’ll receive a margin call or your positions will be closed at a
loss. Margin and leverage are a two-edged sword.
Many brokers offer a demo account so you can get used to the trading
platform and test your trading strategies before you put real money on the
line.
Forex Currency Trading
Currency trading, foreign exchange or forex as it’s more commonly known,
has fast become one of the most popular markets for private traders in
recent years.
As its name suggests, it involves buying and selling foreign currency. The
most commonly traded currencies are referenced against the US Dollar and
are sometimes referred to as a “currency pair” even though you are only
trading one instrument. For example, the GBPUSD is the UK Pound/US Dollar
pair. A value of 1.7625 would mean that the one Pound is worth 1.7625
Dollars. Other popular pairs include the Euro (EURUSD), the Swiss Franc (USDCHF)
and the Japanese Yen (USDJPY) although there are others.
So unlike shares and futures, you don’t have a mass of markets to choose
from, but there is variety within forex currency trading to give you a
range of markets to trade.
The value of each pair differs slightly but the minimum movement – called
a “pip” – is worth approximately $10. The GBPUSD has been averaging
100-150 pips per day which would be $1000-1500. Many brokers let you trade
half or even quarter-size lots which are useful when you’re starting out.
Also, many brokers offer a demo account so you can practice before risking
real money.
The total value of the forex market is worth trillions of dollars per day,
far larger than shares or futures. It is also a truly international market
with dealing taking place all around the globe 24 hours per day from
Monday to Friday. You can, therefore, trade at any time of the day or
night at times to suit you. It’s worth noting, however, that the bigger
moves generally occur during the US and European trading sessions.
You can sell short forex just as easily as you can buy and brokers offer
highly-leveraged accounts too – but the same warning regarding margins
apply here as well.
Brokers tend not to charge a commission for trading forex and you will
often see adverts for “commission free” trading. However, they make their
money on the spread which is the difference between the buying price and
the selling price. The spread is usually between 3 and 5 pips although
some brokers may offer a 2 pip spread on some pairs, and some less-popular
pairs may have a larger spread.
Paying on the spread is particularly useful when trading mini lots. A
3-pip spread on a quarter lot will be about $7.50 whereas on a full-size
lot it would be $30. Again, the spread is more important when trading
short time frames where you’re only aiming to make a few pips per trade.
You need to build the spread into your trading system so you don’t
overestimate the amount you might make per trade.
One interesting aspect of forex currency trading is that there is no
central clearing house where absolute prices are quoted, unlike shares and
futures. So it’s quite possible to see different brokers quoting slightly
different prices for the same pair. As the market has become more
efficient, this difference has reduced, in most cases, to a few pips but
it highlights the importance of checking that the data you are using for
analysis is the same – or close to – that used by your broker for placing
your orders.
The market you decide to trade will depend on many things, not least of
all, your budget, but also how many markets you want to look at and what
hours you want to trade. There are trading vehicles to suit all
preferences and pockets.
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