Welcome to the Trading Basics section. This section is designed to introduce beginners to the fascinating world of trading.
Trading can be a very exciting and worthwhile endeavour and the main attraction for many people (not including ‘making money’ which is obvious) is the fact that you can do it from almost anywhere.
Some advantages of trading include:
- Self employed – you are your own boss
- Geographical freedom – technological advances are making this easier every day
- Minimal capital outlay – compare this with purchasing a franchise
- Unlimited potential for profit – financial freedom is what most traders aim for
- Flexibility with time – you choose when you trade and when you don’t
- Almost anyone can do it – if you are old enough (usually 18 or 21), you can open a trading account and begin
There are of course some disadvantages like:
- No guaranteed success – many people don’t make money trading
- Can be stressful and emotional – when you are ‘playing’ with your own money, this is almost inevitable
- Solitary existence – trading can be a very lonely profession
OK, let’s face it – the main reason why people trade is to make money. How do we do that however? In simple terms, we buy a financial product and then sell it later for a higher price.The product may be stock in a company, a futures contract or even a foreign currency. A lot of people don’t make money so make sure you read about why traders fail.
Trading vs. Investing
Generally, investing involves buying shares/stock for long term capital growth. Most people, even those who have never purchased shares before, are familiar with this traditional approach to the market.
For many years a ‘buy and hold’ approach has been the staple menu for many investors in the sharemarket. After identifying a potential solid large company, shares would be purchased and locked away in the bottom drawer. The ownership was similar to a marriage in that it was undertaken for ‘better or worse’.
Through good and bad times, an investor would be secure in the knowledge that the company would pay periodic dividends and that over many years, would return steady capital growth.
Trading on the other hand, involves buying and selling more regularly in the pursuit of small, often and consistent financial gains. People have been trading for many many years and those who are successful generally enjoy all of the advantages listed above.
One thing you need to be aware of however. Trading has a greater potential for reward than investing but with that extra potential for reward is greater risk. Those who trade well have been well educated and prepared. Very seldom does somebody start trading and make money from day 1. Often you will hear the saying ‘Only Educated Traders Survive’.
What are these markets?
|If you are interested in basic information about the Australian Securities Exchange (ASX), please read about these topics below:
Otherwise, please read on.
Markets to facilitate trading are established in most developed countries and have existed for many years. Furthermore, markets are now vital parts of the corporate world in that country and therefore are highly likely to continue to operate for many years to come.
Markets are a vital part of the corporate world and exist to serve two general purposes. First, they allow for the bringing of buyers and sellers of capital together in an efficient manner. It therefore channels capital resources to those who will make the best use of them.
This means that we as an individual can invest some of our own money into a company along with many others. We would do this by purchasing stock (or shares) in the company.
Stock is an equity security in that it represents the basic unit of ownership in a company. The total of all shares in a company represents its equity capital. Equity capital is also often referred to as ‘risk capital’ as the owners have no guarantee of a return on their investment. When you buy stock, you become a part owner of the company and therefore share in its profits and losses.
One benefit of owning stock is receiving dividends and the other (of more interest to traders) is from the capital gain you can enjoy. Stock prices fluctuate on a daily basis according to the supply and demand for that stock and you are able to benefit from a rising price and selling the stock for higher than what you purchased. Net result is a profit.
Having access to such an efficient process of capital resource allocation, we should ideally earn the best rate of return when investing in those companies listed on the stock market.
The second purpose of markets (moreso for derivative and foreign currency markets) is for the management of risk. It allows for large companies who have a risk exposure in the future to hedge and protect themselves against an adverse move in the price of something. These markets are very actively traded and includes trading between large banks, central banks, governments, and other financial markets and institutions.
Derivatives include products like options and futures, and foreign currency markets facilitate the trading of just that – cash. You buy an amount of money in one currency with the equivalent amount in another currency. The foreign currency markets, aka ‘foreign exchange’, ‘forex’ and ‘FX’ are the largest in the world, ie. they consistently have the most money traded every day.
Individual traders will also trade these large markets and are known as speculators. That’s people like you and I.