Trading within stocks, binary options and CFD’s (CFD’s can only be traded if you are outside the US) 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 use of stock trading platforms and software.
As I 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, you will see to the side in the navigation, that I have provided you with 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.
I want to point out that I am not advocating self-trading, I 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.
I will be adding to the navigation, various reviews of the numerous investment services and providers for self-trading so that you can assess the best trading provider for 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?
I mentioned three forms of trading at the beginning of this page; Stock, Binary & CFD. Each one has its benefits and pitfalls, and below, I explain the basic aspects of each type of trading, 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 the USA, CFD trading is not available to you)
To own part of a company, you buy stocks, shares or equity. All these terms represent the same thing: part of a company’s assets or earnings. When you invest in stocks, you become a shareholder. Shareholders are a group of people or organizations that own a company and are entitled to voting rights as stated in the contract of said company.
When you buy stocks or shares, you are issued with a stock certificate which acts as proof of ownership. You can use this document to trade shares. If you use a broker, they will maintain an electronic copy of the stock certificate to simplify trading.
But it’s also important to note that shareholders do not have a say on every activity that goes on in the company. You can have a say in choosing the management but not on daily operations of the business. But larger investors and entrepreneurs who own a huge part of the company have more power to make decisions.
A company issues stocks for several reasons. The main reason is that it helps the company to raise money. They will borrow from several people and then when they use the money, they will share the profits with all shareholders. Sometimes the company doesn’t want to borrow money from a bank or issue bonds for various reasons and so it decides to seek equity financing because it doesn’t have to pay back the money or make interest payments along the way.
When a company issues the first sale of a stock, it is regarded as an initial public offering, which is also known as an IPO. Buying stocks does carry certain levels of risks which you must understand before you buy. I do cover this in another article on the risks in buying stocks. You also need to know the difference between buying a debt investment and an equity investment. Stocks are an equity investment which means that you are not guaranteed the return of your money together with the interest payments.
It’s also worth noting that when a company goes bankrupt, it may be impossible to recover your investments. Bond holders are usually given more priority than shareholders. Some companies may pay dividends while others may not. The ones that don’t pay dividend allow investors to make money in the open market when their money appreciates over time.
Although investing in stocks might sound very risky, people have made lots of money out of this form of investing. History has shown stocks have outperformed all other forms of investment like bonds and savings accounts because they usually present higher interest rates. Stocks can have an average return of 10-12% whereas bonds can have a much lower average return of 4-6%. Visit our stock trading page if you want to learn more about the subject.
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.
On expiry of the option (in one hours’ time) if the value of the US dollar is above the value of the Euro at the commencement of the option you win. Your return will depend on what percentage of profit the broker you placed the option through will pay. For example, a broker paying 85% will see you gain $85 on your $100 investment in addition to the return of the original stake. So you put $100 in and were able to take $185 out on a successful call.
In the scenario above:
• The underlying assets were the US dollar and the Euro.
• The exchange rate at the time you took out the option was the entry price or target price.
• Because you predicted a gain in value of the US dollar you made a call option. Had you predicted a drop in value you would have made a put option.
• The exchange rate at the time of expiry of your option was the exit price or expiry price.
• In this example, you made a successful call, so you finished in the money. Had your call not been successful you would have finished out of the money.
A second popular form of binary option is the one touch binary option. This enables you to win if you successfully predict the value of the underlying asset will reach a price that you designate within the time frame of the option.Check out providers like IQ Option who offer a wide range of services to carry out trades easily.
Usually, longer time frames are seen in one touch options with one day, close of trading and one hour being more commonly seen.
One touch options offer higher rates of return the more unlikely the predicted value appears at the commencement of the option.
Boundary binary options work by you being able to predict the value of the underlying asset will either remain within a given value range or be outside that range. It doesn’t matter whether the value is above or below the range limits, you are simply predicting movement or volatility.
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. (Check out our review of one of the leading CFD trading software’s Plus500)
How CFD Trading Works
Going long or short
In CFD trading, you can choose to sell, go short, if you predict the market price will fall or buy, go long if you predict that the market prices will rise. If you sell, your profit increases with any fall in that price, even if it is just by a couple of cents. However, if the market moves against the position that you take, your loss will also increase. CFDs enable the trader to benefit from any move whether market process is rising or falling.
You can use CFD to hedge your current trading portfolio. If you predict that your portfolio will lose some of its value, you can go short on your CFD to offset the loss. An example, if you own $300 worth of shares in a certain company and predict that the price of these shares will fall, you can go short on the equivalence of $300 CFDs. Therefore, whether the prices of these shares eventually fall, whatever losses you make in your shares will be offset by the profits you make while going short in your CFD trading. As an investor, CFD can be very valuable for hedging in volatile trading commodities.
With the nature of CFD trading, it is important to have your eye on the markets on a 24-hour basis. You can trade whenever you want, 24 hours a day, seven days a week. In the volatile markets, prices move very quickly and 12 hours could make a world of difference.
Margin and Leveraging
Margin refers to paying a portion of the total value of the trade to open your position in the CFD. This kind of leveraging in CFD trading helps to magnify returns on investments. This is because the full trading exposure is more than the portion deposit you made to open your position. The only risk is that losses are magnified in the same way if the market moves against your position. In fact, you stand to lose more than the capital you put in. It is important to have risk management strategies in place when it comes to margin and leverage.