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 double-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.
ForexGen provides a unique online trading experience based on our intelligent online Forex trading
package, the ForexGen Trading Station, including the best online trading system.
No comments:
Post a Comment