| Trading covers a multitude of sins, or at least a | | | | and scalping for a few points here and there it |
| multitude of markets. Mention "trading" to a | | | | becomes a considerable part of the cost. |
| non-trader and they'll probably think of stock and | | | | Futures brokers usually offer a margin of around |
| shares but there are many other markets you can | | | | 20% of the value of the underlying instrument so |
| trade in. These include commodities, futures, indices, | | | | you can control $10,000's worth of a contract for |
| CFDs and options. They all have their pros and cons | | | | maybe $2,000. However, the same rules apply - if |
| and some require specialized knowledge. | | | | you over-leverage your account you'll receive a |
| The most popular markets used by traders are | | | | margin call or your positions will be closed at a loss. |
| stocks, commodities, futures, indices and forex. | | | | Margin and leverage are a two-edged sword. |
| Some traders switch between markets, others stick | | | | Many brokers offer a demo account so you can get |
| to just one. Let's highlight some of the similarities and | | | | used to the trading platform and test your trading |
| differences between them. | | | | strategies before you put real money on the line. |
| Shares | | | | Forex Currency Trading |
| In the USA there are over 40,000 shares so you | | | | Currency trading, foreign exchange or forex as it's |
| have a lot of markets to choose from. You can't deal | | | | more commonly known, has fast become one of the |
| in all of them so you need to home in on those that | | | | most popular markets for private traders in recent |
| offer good trading opportunities using whatever | | | | years. |
| trading methods you decide to use. | | | | As its name suggests, it involves buying and selling |
| When buying shares you usually have to put up all | | | | foreign currency. The most commonly traded |
| the money at the time of sale. That might seem | | | | currencies are referenced against the US Dollar and |
| obvious but it's not so with all markets. Some | | | | are sometimes referred to as a "currency pair" even |
| brokers offer a 50% margin with shares which | | | | though you are only trading one instrument. For |
| means you can trade to the value of twice the | | | | example, the GBPUSD is the UK Pound/US Dollar pair. |
| amount in your account. This seems like a good deal | | | | A value of 1.7625 would mean that the one Pound is |
| but if your shares start to go down you'll get a | | | | worth 1.7625 Dollars. Other popular pairs include the |
| "margin call" and will either have to put more money | | | | Euro (EURUSD), the Swiss Franc (USDCHF) and the |
| in your account or sell the shares at a loss. | | | | Japanese Yen (USDJPY) although there are others. |
| Shares are normally traded in lots of 100. If you want | | | | So unlike shares and futures, you don't have a mass |
| to trade an expensive share - and some shares are | | | | of markets to choose from, but there is variety |
| very expensive, particularly in the US markets - you | | | | within forex currency trading to give you a range of |
| need a considerable amount of money in your | | | | markets to trade. |
| account. | | | | The value of each pair differs slightly but the |
| It's not easy to sell shares short. Selling short is a | | | | minimum movement - called a "pip" - is worth |
| strange concept to many people who think of buying | | | | approximately $10. The GBPUSD has been averaging |
| shares at a low price and selling then at a higher price. | | | | 100-150 pips per day which would be $1000-1500. |
| But it's often easier to predict that a share will fall | | | | Many brokers let you trade half or even quarter-size |
| rather than rise so what you'd like to do is to sell it | | | | lots which are useful when you're starting out. Also, |
| at a high price and then buy it back later at a low | | | | many brokers offer a demo account so you can |
| price. The net result is the same whatever the order | | | | practice before risking real money. |
| of the deals - buy low, sell high. | | | | The total value of the forex market is worth trillions |
| However, you can't sell something you don't own so | | | | of dollars per day, far larger than shares or futures. It |
| in order to sell shares short you must "borrow" them | | | | is also a truly international market with dealing taking |
| from your broker. This is not quite as straightforward | | | | place all around the globe 24 hours per day from |
| as buying and not all shares are available for selling | | | | Monday to Friday. You can, therefore, trade at any |
| short. | | | | time of the day or night at times to suit you. It's |
| Finally, share dealing takes place during market hours | | | | worth noting, however, that the bigger moves |
| so if you don't live in the country where they are | | | | generally occur during the US and European trading |
| being traded you must adjust your trading hours to | | | | sessions. |
| suit. | | | | You can sell short forex just as easily as you can |
| Futures, commodities and indices | | | | buy and brokers offer highly-leveraged accounts too |
| Commodities are goods such as corn, copper, crude | | | | - but the same warning regarding margins apply here |
| oil, orange juice, oats, gold and wheat. | | | | as well. |
| Technically, a futures contract is an agreement to | | | | Brokers tend not to charge a commission for trading |
| make or accept delivery of a commodity on a certain | | | | forex and you will often see adverts for "commission |
| day at a certain price. In practice this rarely happens | | | | free" trading. However, they make their money on |
| unless you're a manufacturer who actually wants the | | | | the spread which is the difference between the |
| goods. The vast majority of futures traders are | | | | buying price and the selling price. The spread is usually |
| simply speculating on whether the price will go up or | | | | between 3 and 5 pips although some brokers may |
| down and never take delivery of an item. | | | | offer a 2 pip spread on some pairs, and some |
| Futures contacts include commodities and also stock | | | | less-popular pairs may have a larger spread. |
| market indices such as the S&P 500, Dow Jones | | | | Paying on the spread is particularly useful when |
| and the Russell. Indices are simply a composite of | | | | trading mini lots. A 3-pip spread on a quarter lot will |
| securities that provide an overall reading of the | | | | be about $7.50 whereas on a full-size lot it would be |
| market or some section of it. | | | | $30. Again, the spread is more important when |
| The S&P 500 (Standard & Poor's 500) | | | | trading short time frames where you're only aiming |
| tracks 500 of the largest companies in the US | | | | to make a few pips per trade. You need to build the |
| market. The Dow Jones Industrial Average tracks | | | | spread into your trading system so you don't |
| only 30 of the largest and longest-established | | | | overestimate the amount you might make per trade. |
| companies while the Russell 2000 is an index of | | | | One interesting aspect of forex currency trading is |
| smaller stocks. | | | | that there is no central clearing house where absolute |
| Essentially, commodities and indices are futures and | | | | prices are quoted, unlike shares and futures. So it's |
| traded in much the same way although traders may | | | | quite possible to see different brokers quoting slightly |
| use the terms interchangeably. | | | | different prices for the same pair. As the market has |
| Unlike shares, futures can be sold short just as easily | | | | become more efficient, this difference has reduced, |
| as they can be bought. Each futures contract has its | | | | in most cases, to a few pips but it highlights the |
| own fluctuating price and many traders deal in just | | | | importance of checking that the data you are using |
| one lot contracts. | | | | for analysis is the same - or close to - that used by |
| Brokers usually charge a flat fee commission per | | | | your broker for placing your orders. |
| contract, often expressed as a "round turn" which is | | | | The market you decide to trade will depend on many |
| one buy and one sell transaction. This may be a few | | | | things, not least of all, your budget, but also how |
| dollars, often less than the value of a point or two | | | | many markets you want to look at and what hours |
| on the contract. If you're trading a long time frame | | | | you want to trade. There are trading vehicles to suit |
| the commission is negligible but if you're day trading | | | | all preferences and pockets. |