Traders: which markets should you trade?
Thanks to the internet there are myriad ways to trade these days, from investing in traditional stocks and shares to buying the current favourite, cryptocurrencies.
And your choice is by no means limited to the actual product - you can buy derivatives, invest in an exchange traded fund or take advantage of the ups and downs of world currencies.
Stocks and shares
Stock markets have been around for hundreds of years so shares are a well-established investment option.
Trading in shares can be long or short. When buying long there is often an intention to keep the shares for a while and to benefit from any price increase and dividends paid.
Selling short is a bit more tactical and complex (it requires borrowing the shares you need to sell). If you think a company’s share price is about to take a tumble, you sell the shares first and then close the trade by buying them back at a lower price.
To buy or sell shares you will need a trading account with a broker with sufficient funds to cover your purchase. The broker, usually online these days, will take commission on your trades.
Trading is available only when the stock market is open.
Investing in the stock market is a well-established option: ShutterstockDerivatives
Derivatives are so called because they derive their price from the value of an underlying asset. Types include contracts for difference (CFDs), options and futures. Derivatives can be taken out on lots of underlying assets such as shares, commodities, forex, indexes and cryptocurrencies.
A CFD is a contract to settle the difference in price at the start and end of a contract period. CFDs are easily tradeable 24/7 from devices such as mobile phones and tablets. They can be used to go long or short without the complexity of shorting actual shares.
With CFD pricing there is a difference, or spread, between the buy price and the sell price. The price at which you buy will be higher than the one you sell at.
CFDs are available in many markets such as shares, commodities, forex, indexes and cryptocurrencies.
Part of the appeal of CFDs can also be their drawback. They use leverage so that only a proportion of the trade’s value needs to be deposited initially. If the trade goes your way this will magnify your gains. If the trade goes against you your losses will greatly increase.
Options are contracts that give the right to buy or sell an underlying asset at a set price by or on a set date. As the name suggests, there is no obligation, just a right.
There are two types of option. A call option gives you the right to buy at a later date; a put option gives you the right to sell.
Listed options can be bought on exchanges such as the Chicago Board Options Exchange or Euronext. They can also be traded online.
Futures differ from options as there is an obligation to settle the contract at a set price on a set date. Futures can be closed early by selling the contract. Options can also be taken out on futures.
Options trading and futures trading, like CFDs, work on leverage so there is also the chance to magnify your profit or your loss on a trade.
One commodity option is livestock: ShutterstockCommodities
Commodities come in a number of guises including gold, oil, food and livestock. But it is unlikely that you will have to find room in your back garden for a herd of hungry cattle as most commodity trades are futures.
Another way of commodity investing is to use an exchange traded fund or ETF. Shares in the fund are traded on exchanges and track the price of the underlying asset.
This is a good option if you are interested in investing in gold. Rather than having to find a secure home for your gold bars you can just take advantage of moves in the gold price.
Forex
This is the largest financial market, with deals worth more than those of the equity and futures markets combined.
Foreign exchange trades involve pairs of currencies. The US$ is the most popular currency, followed by the Euro and the Yen. Trading is possible 24/7 Monday to Friday.
Forex trades work through online brokers who allow leverage on the trades.
Cryptocurrencies
Cryptocurrencies – encrypted digital currencies - have been in the news a lot recently, mainly thanks to Bitcoin’s rollercoaster-ride price changes.
Bitcoin is the largest network. Other major cryptocurrencies include Ethereum, Ripple and Litecoin.
Cryptocurrencies can be bought through a broker, such as Coinbase or Blockchain, direct from sellers or from coin ATMs.
Cryptocurrencies are at the riskier end of the investment spectrum because no one can say for certain how the market will settle down in the long term.
Cryptocurrencies have been in the news a lot: ShutterstockIndexes
If you want your investment to track the performance of an index you can buy an index fund, which will have the same constituents as the index it is tracking. An index ETF will also mimic the index it tracks.
Choices
When deciding where to put your money you need to look at how risky the investment is, what the possible returns are and how long you want to tie your money into something.
A portfolio with a mix of long-term and short-term investments in a variety of assets is a good idea as it spreads risk - putting dependable blue chips in with the tech stocks, for example.
And it is wise to know what risks you are happy with and at which point prudence should take over. Adding stop losses to your investments to stop you throwing good money after bad, say.
As hedge fund manager Seth Klarman has said: “Investors should always keep in mind that the most important metric is not the returns achieved but the returns weighed against the risks incurred. Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.”
Markets in this article