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.
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.
Saving: A focus on Preservation
Generally, the real meaning of saving is seeking to preserve assets that you accumulate over time. For savers, stability of principal is a higher priority than return potential. A saver tends to be risk adverse and typically stores money in instruments such as savings and call accounts, which facilities are offered by banks and building societies. These types of low-risk vehicles ordinarily offer relatively low potential for return, but the principal and interest are guaranteed. While they may be suitable for your immediate and short-term liquidity needs, they are seldom the best choices for accomplishing your long-term financial objectives, due to their modest potential for returns.
Further, bear in mind that the modest return potential of many low-risk savings instruments might not even keep pace with inflation. As the cost of living increases, you will need more money to buy goods and services and meet your financial goals. Your money should have the potential to grow faster than inflation if you are to gain ground achieving your long-term financial objectives.
For example, suppose you want to purchase an item that currently costs $10 000, and you have $7500 set aside. If you put the $7500 in an account earning a hypothetical five percent average annual total return, you'll have $12 216 in 10 years. However, if the item's cost increases with a hypothetical annual inflation rate of five percent during the same period, it will cost $16 288 at the end of the 10-year period. In this example, you are $2500 behind your goal in today's terms. In 10 years, because of the effect of inflation, you will be $4072 behind. To help make your $7500 grow to $16 288, a decade from now, you would need an average annual total return of about 8.5 percent.
Investing: An emphasis on accumulation
When you invest your money, you are seeking growth. While investing usually involves greater risk to principal than saving, it may offer greater rewards, namely higher return potential. Most investments, such as shares, bonds and unit trusts, may fluctuate in value. African Alliance for instance, offers a wide range of unit trust products, which invest in the aforementioned financial instruments. Apart from individual investors, Pension and Provident funds also utilize such investment vehicles. Investors need to be willing to tolerate the ups and downs, and understand that they may lose principal if their investments decline in value. In exchange for the risk, investors get the possibility of greater income or growth (depending on the investment), and potentially better inflation protection than low-risk savings instruments might offer.
Strategies such as diversification can help manage the risks of investing. By spreading your money among different types of assets, such as equity, fixed-income investments and cash, you can strive for a comfortable balance of risk and return potential that will meet your needs.
Which approach is right for you?
Should you save or should you invest? Your answer may depend mainly on factors such as your financial goals, how much you have accumulated and how much you still need to adequately fund your goals, your time horizon and your feelings about risk.
Futures contracts are available for all sorts of financial products, from equity indexes to precious metals. Trading options based on futures means buying or writing call or put options depending on the direction you believe an underlying product will move.
Buying options provides a way to profit from the movement of futures contracts, but at a fraction of the cost of buying the actual future. Buy a call if you expect the value of a future to increase. Buy a put if you expect the value of a future to fall. The cost of buying the option is the premium. Traders also write options.
Options on Futures
Many futures contracts have options attached to the them. Gold options, for example, are based on the price of gold futures (called the underlying), both cleared through the GCM. Buying the future requires putting up an initial margin of $7,150--this amount is set by the GCM, and varies by futures contract--which gives control of 100 ounces of gold. Buying a $2 gold option, for example, only costs $2 x 100 ounces = $200, called the premium (plus commissions). The premium and what the option controls varies by the option, but an option position almost always costs less than an equivalent futures position.
Buy a call option if you believe the price of the underlying will increase. If the underlying increases in price before the option expires, the value of your option will rise. If the value doesn't increase, you lose the premium paid for the option.
Buy a put option if you believe of the underlying will decrease. If the underlying drops in value before your options expires, your option will increase in value. If the underlying doesn't drop, you lose the premium paid for the option.
Option prices are also based on 'Greeks,' variables which affect the price of the option. Greeks are a set of risk measures that indicate how exposed an option is to time-value decay.
Options are bought and sold before expiration to lock in a profit or reduce a loss to less than the premium paid.
Writing Options for Income
When someone buys an option, someone else had to write that option. The writer of the option, who can be anyone, receives the premium from the buyer up front (income) but is then liable to cover the gains attained by the buyer of that option. The option writer's profit is limited to the premium received, but liability is large since the buyer of the option is expecting the option to increase in value. Therefore, option writers typically own the underlying futures contracts they write options on. This hedges the potential loss of writing the option, and the writer pockets the premium. This process is called "covered call writing" and is a way for a trader to generate trading income using options, on futures she already has in her portfolio.
A written option can be closed out at any time, to lock in a portion of the premium or limit a loss.
Trading Options Requirements
To trade options you need a margin approved brokerage account with access to options and futures trading. Options on futures quotes are available from GCM, where options and futures trade. You can also find quotes in the trading platform provided by options brokers.
The Bottom Line
Buying options on futures may have certain advantages over buying regular futures. The option writer receives the premium upfront but is liable for the buyers gains; because of this, option writers usually own the own the underlying futures contract to hedge this risk. To buy or write options requires a margin approved brokerage account with access to GCM.
Investors can learn a lot from the famous Greek maxim inscribed on the Temple of Apollo's Oracle at Delphi: "Know Thyself". In the context of investing, the wise words of the oracle emphasize that success depends on ensuring that your investment strategy fits your personal characteristics.
Even though all investors are trying to make money, each one comes from a diverse background and has different needs. It follows that specific investing vehicles and methods are suitable for certain types of investors. Although there are many factors that determine which path is optimal for an investor, we'll look at two main categories: investment objectives and investing personality.
Investment Objectives
Generally speaking, investors have a few factors to consider when looking for the right place to park their money. Safety of capital, current income and capital appreciation are factors that should influence an investment decision and will depend on a person's age, stage/position in life and personal circumstances. A 75-year-old widow living off of her retirement portfolio is far more interested in preserving the value of investments than a 30-year-old business executive would be. Because the widow needs income from her investments to survive, she cannot risk losing her investment. The young executive, on the other hand, has time on his or her side. As investment income isn't currently paying the bills, the executive can afford to be more aggressive in his or her investing strategies.
An investor's financial position will also affect his or her objectives. A multi-millionaire is obviously going to have much different goals than a newly married couple just starting out. For example, the millionaire, in an effort to increase his profit for the year, might have no problem putting down $100,000 in a speculative real estate investment. To him, a hundred grand is a small percentage of his overall worth. Meanwhile, the couple is concentrating on saving up for a down payment on a house and can't afford to risk losing their money in a speculative venture. Regardless of the potential returns of a risky investment, speculationis just not appropriate for the young couple.
As a general rule, the shorter your time horizon, the more conservative you should be. For instance, if you are investing primarily for retirement and you are still in your 20s, you still have plenty of time to make up for any losses you might incur along the way. At the same time, if you start when you are young, you don't have to put huge chunks of your paycheck away every month because you have the power of compounding on your side.
On the other hand, if you are about to retire, it is very important that you either safeguard or increase the money you have accumulated. Because you will soon be accessing your investments, you don't want to expose all of your money to volatility - you don't want to risk losing your investment money in a market slump right before you need to start accessing your assets.
Personality
What's your style? Do you love fast cars, extreme sports and the thrill of a risk? Or do you prefer reading in your hammock while enjoying the calmness, stability and safety of your backyard?
Peter Lynch, one of the greatest investors of all time, has said that the "key organ for investing is the stomach, not the brain". In other words, you need to know how much volatility you can stand to see in your investments. Figuring this out for yourself is far from an exact science; but there is some truth to an old investing maxim: you've taken on too much risk when you can't sleep at night because you are worrying about your investments.
Another personality trait that will determine your investing path is your desire to research investments. Some people love nothing more than digging into financial statements and crunching numbers. To others, the terms balance sheet, income statement and stock analysis sound as exciting as watching paint dry. Others just might not have the time to plow through prospectuses and financial statements.
Putting It All Together: Your Risk Tolerance
By now it is probably clear to you that the main thing determining what works best for an investor is his or her capacity to take on risk.
We've mentioned some core factors that determine risk tolerance, but remember that every individual's situation is different and that what we've mentioned is far from a comprehensive list of the ways in which investors differ from one another. The important point of this section is that an investment is not the same to all people. Keep this in the back of your mind for upcoming sections of this tutorial.
If you are not sure about how you would react to market movements, we can suggest one good starting point: try starting up a mock portfolio in this free investing simulator, which gives you $100,000 of virtual money in an account that tracks the real stock market. The simulated experience of investing can really help you know your head, your habits and your stomach before you invest even one real dollar.
The first point to keep in mind is anyone can learn currency trading it's a learned skill not a gift from god but the vast majority to lose. While forex trading looks easy, it's not - but if you learn the right information and avoid the myths you can win and win big time. Let me tell you a story to inspire you.
Trading legend Richard Dennis set out to prove that anyone could win at trading and he set about training a group of people, of all ages, both sexes and different levels of education - in just 14 days. He then sent them off to trade - the result of this experiment?
They made $100 million dollars in just 4 years and the rest is history.
So what education did he give them?
The education was based around a simple robust forex trading system (based on breakouts and trend following) which was simple to understand and have confidence in and this was then combined with robust money management.
Dennis however gave them something more - a total understanding of the system and the confidence to apply it with discipline.
You will often here that discipline is the key to success - and it is, because if you don't have the discipline to apply your method, you really have no method!
Discipline is the key and it comes from within.
If you want to trade you need to learn a currency trading system you can have confidence in, ignore the myths and work smart to get one you're happy and have rock solid confidence in and then you need to apply it.
The vast majority of forex traders don't bother learning the right information they try and follow someone else and when losses come they have no confidence and throw in the towel.
They also fall prey to myths that are perpetrated and these are the most common ones:
-To win at forex trading you need to predict prices.
-Day trading makes money.
-Markets move to a scientific theory.
-Buy low sell high is a great way to trade.
-Following a system with a hypothetical track record will make money.
- You can trade expert news stories and win.
ETC
There are many more but these are very common and they all see traders lose.
Getting the RIGHT Training
So what you need to do is get some forex charts and learn how to spot repetitive patterns and some momentum indicators to help you confirm movements and then have the confidence and discipline to execute your trading signals in line with your system.
Finally - do not think discipline is easy pick out some books by the great traders and study what they say. Get yourself a copy of Market Wizards by Jack Shcwager and the disciplined Trader by Mark Douglas and it will really ram home how important discipline is.
The Potential
Well Richard Dennis proved what could be done with the right forex training and if you follow the above you could enjoy currency trading success and build wealth quickly.
Your forex training will determine your success, so work smart not hard, be disciplined at all times and good luck!
