Chief trading strategist at CMTrading, Fred Razak, has been trading on the financial markets for well over 20 years. Here he answers 10 pressing questions about online trading commonly asked by internet users.<\/p>\n
What is stock trading?<\/strong><\/p>\n \u201cNot to be confused with investing in stocks, stock trading is the act of observing price fluctuations on specific stocks throughout the day, and then anticipating and speculating as to future movement in that stock, then taking a pragmatic position (i.e. buying and\/or selling short the stock) to make a profit.<\/p>\n \u201cIn essence, as a stock trader, you’re looking for patterns and trading signals in the market and taking advantage of price fluctuations \u2013 both upwards and downwards.<\/p>\n “If a stock price drops due to various circumstances but you think it may bounce back in the future, there lies the opportunity to make a profit. It is not an exact science but there are many factors and historical patterns you can reference to forecast future outcomes.\u201d<\/p>\n What is options trading?<\/strong><\/p>\n \u201cOptions are contracts that allow you to take the \u2018option\u2019 of buying or selling short a on a tradeable asset or choose not to take one. So, you aren\u2019t buying the actual stock, you\u2019re paying for the right to buy or sell the stock. Think of it as putting down a deposit on something \u2013 not the full value, that gives you the option to buy or sells something in the future.<\/p>\n \u201cWhen you buy an option, you base your speculation on the anticipation that the price will increase but, since you have already locked in the price today, you stand to profit instantly when the price trades above your purchase price of the option. You then have the right to trade the asset on that date. But you aren\u2019t obliged to do it. If you decide to trade, that\u2019s called exercising the option.<\/p>\n \u201cOptions are traditionally used in hedging strategies in order to reduce market risk.\u201d<\/p>\n What is a CFD?<\/strong><\/p>\n \u201cCFD trading or \u2018Contract for Difference\u2019 trading means, you’re not trading the actual asset; rather you’re trading a representation of an asset. In the United States, CFDs are only traded by the major financial institutions themselves, not by retail investors; whereas outside the US, CFDs are quite common and are traded by both.<\/p>\n \u201cA CFD is a simple contract between a trader and a seller. In share trading, if you bought 10,000 shares at R2.00 each, you would pay R20,000. But if you buy a CFD as opposed to purchasing the shares, your broker may offer you a CFD at 10% of that value, with a 10% margin\/difference agreement.<\/p>\n “With a 10% agreement in place, you are exposed to the same 10,000 shares at just 10% of the price a share buyer would pay. That means you pay R2,000 and if the share price goes up by 5c, you make a profit of around R500 (5c x 10,000 shares = R500). So, you recoup your initial investment plus the difference.\u201d<\/p>\n What is leveraged trading?<\/strong><\/p>\n \u201cLeverage implies the ability to control a larger amount of money based on a good faith deposit. In other words, somebody who opens up an account with R 100 can trade for more than that amount to take advantage of the markets.<\/p>\n \u201cLeverage is a trading mechanism investors can use to increase their exposure to the market by allowing them to invest less than the full amount needed to trade the asset.<\/p>\n “The trader uses credit provided by a broker so that they only have to invest a percentage of the value of the transaction \u2013 BUT \u2013 something a trader must always consider is their coverage or risk ratio because the trader is responsible for any losses, not the broker.\u201d<\/p>\n What is forex trading?<\/strong><\/p>\n \u201cForex trading is very common in the international trading arena. The principle is very straightforward. In fact, the concept is similar to stock trading in terms of watching prices fluctuate and cashing in on those fluctuations. For example, you would have two currencies traded against each other. You buy one and you sell the other or sell one and buy the other.<\/p>\n \u201cSay you\u2019re trading US dollars versus South African Rands, you would buy one currency when its value falls, then sell it against the other currency when the value increases \u2013 a simple profit and loss principle.\u201d<\/p>\n What is futures trading?<\/strong><\/p>\n \u201cFutures are a popular way for beginner traders to learn. Futures trading is a sales agreement between a buyer and a seller for the price today and a delivery of the asset in a future date, thereby locking in the price now.<\/p>\n The buyer agrees to buy a commodity (or forex or stock) by a certain date. The seller agrees to provide the commodity at the future date for the price that is quoted today. In futures trading, once the agreement between buyer and seller is finalised, the agreement stands, even if the price of the commodity goes up by the specified date.<\/p>\n \u201cA good example of this is when the price of oil is traded in a contract form. It is done this way to set a basis for global financial stability in the price of oil. If the price of oil is $100 today and you agree to buy it at $100 a month from now, even if it goes up to $150 in that month, you still pay $100.<\/p>\n Conversely, if the price goes down to $90, you will also pay $100. So, either the buyer or the seller could win or lose, depending on the price movement of the commodity. Setting these agreements helps transportation companies like airlines set prices without too much exposure\u201d<\/p>\n How do you trade stocks?<\/strong><\/p>\n \u201cThis is a straightforward answer. No matter what you are trading \u2013 whether it\u2019s futures, CFDs, forex, symbols indices or anything else \u2013 never gamble. Always apply technical analysis before you invest any money. And always work with a reputable broker that can educate you and help you learn.<\/p>\n \u201cNever overextend yourself. Start by taking responsible risks with small investments that are within your comfort zone. Opportunities to get more aggressive and trade larger will always present themselves, but initially you want to build your confidence, both in yourself and the markets. Always start with managing your risk.\u201d<\/p>\n What is scalping?<\/strong><\/p>\n \u201cScalping is a method of going in and out of the markets in a very short timeframe and making many \u2013 even hundreds of \u2013 daily trades in small profits. Most of the time, scalpers are looking to be in and out of a trade in seconds.<\/p>\n \u201cUsing this method, exposure is limited to incremental amounts, and even though profits are small, risk is reduced. I might even call it \u2018intraday\u2019 trading. It\u2019s an effective, time-intensive way of trading that won\u2019t make you a fortune overnight but can pay off with patience and strategy.\u201d<\/p>\n How do you trade cryptocurrencies?<\/strong><\/p>\n \u201cThis is the million-dollar (or around 30 Bitcoin) question. Cryptocurrencies haven’t been around for a long time. And most technical analysis is based on limited historical data. So, it’s a little bit harder to finesse exactly what the game entails.<\/p>\n \u201cBitcoin Trading is volatile and unpredictable. Similarly, in the early 2000s, there was the dot-com boom, which briefly traded like cryptocurrencies are trading today. But the dot-com bubble had a rapid fall from grace. Bitcoin may or may not experience the same volatility but, it is still trying to create a name for itself.<\/p>\n \u201cHistorically, Bitcoin fluctuates in lower timeframes and because of the volatility, scalping is one way to potentially take advantage of that and minimise your risk (but this is only opinion, not gospel). Trade frugally and cautiously, not necessarily daily, but potentially enough to produce a steady income stream.\u201d<\/p>\n How are commodities traded?<\/strong><\/p>\n \u201cCommodities are very closely traded under the futures umbrella. Commodity symbols expire from month to month, unless you have a recurring contract \u2013 for example, with oil or gold. Sometimes, however, you could just trade the asset itself without a futures contract.<\/p>\n \u201cAs with any other asset, applying an educated month-to-month analysis and partnering with an informed broker is the best way to go.\u201d<\/p>\n
\n
\n
\n
\n
\n
\n
\n
\n
\n
\n