Trading within, binary options, CFD’s (both can only be traded in particular countries and within certain guidelines) and Forex, to name just a few ways to trade, has always been popular, and as time goes by, it is getting easier. Whereas historically the only way to trade was through a registered broker, today people are able to bypass brokers and do their own trading through the various trading platforms and software.
As we mention above, there are numerous ways to trade and make money (as well as lose it!) and so the question has to be asked, which way of trading is the best way for you? Well, that is why we have put together an assortment of information on a number of various trading options so you can get a detailed explanation as to what exactly each trading type is and whether it is suitable for you, depending on your trading education and experience.
We want to point out that we are not advocating self-trading. We strongly recommend and advise that if you have never invested through trades before, you do use the service of a fully qualified and registered stock broker. However, if you understand the risks as well as the benefits of trading yourself, and it is something that you want to do, then hopefully the information in this section will help you.
There are numerous reasons as to why people trade. It can be either to invest for their future, particularly their retirement, or to simply to diversify an investment portfolio or it could be to make money today. If you are looking to do the latter, (known as day trading) then you need to be aware that trading with a view to making money on a daily basis comes with a high level of risk. Whereas a job provides daily income, being a day trader does not provide any guarantee of regular income and therefore, should not be considered unless you 1. know the risks involved 2. are prepared to potentially have more days of losses than gains and 3. know what you are doing.
There are numerous benefits to trading (as well as disadvantages), such as building a strong financial future and diversifying your investment portfolio and like anything in life, if planned well the risks can be low. But also like anything in life, there are risks to trading and as long as you don’t go into trading with your eyes shut and without all the information, you won’t eradicate risk, but you can keep it to a minimum.
Trading can be fun and rewarding, enjoy it, learn it, take your time and hopefully the financial rewards will be very beneficial for you.
So What Are The Various Trading Options?
We mentioned three forms of trading at the beginning of this page; Binary CFD and Forex. Each one has its benefits and pitfalls, and below, we provide a basic introduction to each type of trading, with a link to a more detailed guide, so that you can get a clearer understanding (if you don’t already have it) of what each one is and how they work. (Note – If you are living in certain countries such as the USA, CFD trading is not available to you. If you live in the EU, binary option trading is not available to you unless you are a professional trader)
Binary Options Trading
If you know what binary options are then you have no need to read this bit, and you may want to go to one of the relevant reviews of option trading companies we have carried out – navigation to the side. If you have never traded in options before or no nothing about it, then read on!
Binary options are a financial instrument whereby an investor can attempt to predict which way and by how much the value of a commodity, stock, currency or index will move within a given time frame.
Binary Options Trading is effectively a way to bet on movement within the financial markets. For example, you could take an option on whether you feel the value of the US Dow Jones Index is going to increase in the next hour. If you make the right prediction you get a return on your investment if you get it wrong your stake will be lost.
Although the concept of Binary Trading is easy to understand, making accurate predictions on movements within the financial market has proven to be an elusive goal. However, if you are prepared to put in the work and develop a system, you will greatly increase your chances of being able to make a living from this form of trading.
Binary trading attracts investors for a variety of reasons, the potential for very large returns being the major one. Couple this with the fact that these returns can be derived from relatively low levels of investment and it is easy to understand the rapid growth of this financial investment option.
With Binary Options the underlying asset is never owned or purchased by the investor, as an investor, you are simply trying to predict the movement in the value of that asset. Therefore, the size of your investment doesn’t need to be tied to the value of what you are working with. Most brokers will allow a minimum investment of $10 which makes binary trading an easy entry into market trading.
There are many different types of binary options, the most common being the high-low option. Let’s say you have done some research and feel that the value of the US dollar is going to rise against the Euro in the short term. You decide to buy a binary call option on the US dollar. You will need to look at the time frames offered as there is a wide selection available. Some will take an option over a longer period and some like to work in the short term.
Your prediction is that the value of the US dollar will rise against the value of the Euro within the next hour, so you invest $100 in a call option that expires in one hour.
If you want to know more, read our binary option trading guide.
CFD trading is a term used in trading markets referring to Contract of Difference, which is the agreement between two entities to exchange the entry and exit process of a trade. The contract of difference mirrors the underlying asset making it a tradeable instrument. Therefore as a CFD trader, you will make a profit or loss when the underlying asset moves in relation to the position you take even though you do not own the actual asset.
CFD trading is often a contract between clients and brokers. You do not have to buy or own the underlying instrument, and you just trade on what you expect to be its price movement. With CFD trading, you can profit from falling prices by either selling or offsetting potential losses in your investment by hedging your portfolio. You can find so many markets to trade and CFD allows you access a higher level of exposure in trading. You can deal with CFD is shares, currencies, commodities, forex, indices and many more.
Commodity markets usually influence close to every aspect of our everyday life. From the gas station to the supermarket, to the energy equipment we use to cool and heat our homes, commodity prices continue impacting the world economy on almost all levels. In financial markets, however, commodities could be used as speculative tools or as ways to diversify your broader investment portfolio. Each day, billions of dollars make their way in and out of the commodities market, cementing its position as one of the most crucial asset classes across the globe.
Commodities could be traded in both future markets and spot markets. Spot markets are often associated with real-time prices. For instance, spot diamond prices could show current as $800 per ounce. This basically implies that diamond for instant delivery could be sold or bought at that price (similar to a jewelry store). Typically, spot markets are used by producers and businesses that intend to use the materials in question. It is for this reason that they are always ready to pay the spot prices which are immediately valid.
Exchange Traded Funds (ETFs) are investment funds that hold assets such as bonds, stocks, and foreign currency. ETFs often track indexes such as the Dow Jones, Nasdaq, the Russel 2000, and the S&P 500.
Investing in ETFs does not mean directly owning the underlying investments, but rather means that you have an indirect claim and are entitled to some of the profits as well as residual value in case of liquidation of the fund.
ETF trading works exactly like stock trading as previously stated. ETFs bring together some of the best features provided by stocks and mutual funds. ETFs track benchmark indices and trade on exchanges in shares like stocks.
They provide a cheaper alternative to get exposure on a sector that’s otherwise very challenging to trade. Check out our full ETF Trading guide.
A Forex trade occurs when you take one currency and trade it against another. For instance, you
can buy the US dollar and at the same time sell the Euro, that’s a simple forex trade. Investors and speculators use this form of trading to make money. They expect one currency to weaken/strengthen in value relative to another. If you buy euros and sell dollars, you expect the dollars to strengthen relative to the euro so that you can make a profit. It’s actually quite similar to trading stocks because you hope that the price per share will increase in the future when you buy it. So ideally, you sell a currency pair if you expect it to weaken in value in the future and vice versa.
There are so many complexities surrounding the foreign exchange market (Forex) so we will only get into the basic details to give you an idea of how the foreign exchange market works. First, you need to understand that there is no physical place where the relative values of different currencies are determined like it happens in stock exchanges.
The exchange rate between two currencies will be determined by the supply and demands of currency which affect their value. For instance, if there is an increase in demand or a decrease in supply of dollars then the value of the dollar will rise. On the other hand, if there is an increase in supply or a decrease in demand for dollars, the value of the dollar will fall.
Index trading is entirely different from commodity trading or Forex trading where traders usually invest in commodities or currency respectively. An index is simply a figure which provides a reflection of the health of an economy or the market, so when you invest in indices, you will be simply investing in funds which reflect the movement of the index. With index trading, you are able to invest in a vast segment of the market or even the whole market. In stock index trading, for instance, you could invest in NASDAQ, FTSE 100, the S&P 500 or the Dow Jones, among many other indices that represent separate broad market properties. When you invest in the Dow, for instance, you will be investing in a tremendously large section of the industry market.
Please Note: As Of 2nd July 2018 Binary Options Are Prohibited Within The European Economic Area (EEA) For Retail Traders. If You Live Within The EU And Are Not A Professional Trader You Will Not Be Allowed To Trade Binary Options.
CFDs Are Complex Instruments And Come With A High Risk Of Losing Money Rapidly Due To Leverage. Between 74-89% Of Retail Investor Accounts Lose Money When Trading CFDs. You Should Consider Whether You Can Afford To Take The High Risk Of Losing Your Money