The trading industry is growing as more people have started trading as a way to earn extra income.
Many people would like to get involved in trading, however, some of the trading terms can be unfamiliar to the common man in contrast to the people who belong to the finance industry.
Fred Razak, Chief Trading Strategist from CMTrading, answers 10 pressing questions about online trading that internet users commonly ask.
What is stock trading?
Stock trading is the observation of price fluctuations on specific stocks throughout the day. Then anticipating and speculating about future movement in that stock, then either buying and/or selling short the stock to make a profit.
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.
What is options trading?
Options are contracts that allow a trader the “option” of buying or selling short on a tradeable asset or choosing not to take one. It isn’t the purchasing of actual stock instead you’re paying for the right to buy or sell the stock. Think of it as putting down a deposit on something, that gives you the option to buy or sell something in the future.
With options trading the price is locked in for the day, later on a person can profit when the price trades above the purchase price of the option.
What is a CFD?
Contract for Differences (CFD) trading refers to the trading of a representation of an asset. In the United States, CFDs are only traded by the major financial institutions. Outside of the US CFDs it is common for retail and financial institutions to do CFD trading.
What is leveraged trading?
Leverage 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.
The trader uses credit provided by a broker so that they only have to invest a percentage of the value of the transaction. However, a trader must always consider their coverage or risk ratio because the trader is responsible for any losses.
What is forex trading?
Forex trading, which is very common in the international trading arena, is similar in its concept to stock trading in terms of watching prices fluctuate and cashing in on those fluctuations.
For example, a trader would have two currencies traded against each other. You buy one and you sell the other or sell one and buy the other.
What is futures trading?
Futures trading is a sales agreement between a buyer and a seller for the price today of an asset and the delivery of that asset at a future date. This locks in price of the asset.
Once the sales agreement between buyer and seller is finalised, the agreement stands, even if the price of the commodity goes up by the specified date.
How do you trade stocks?
Always apply technical analysis before investing any money and work with a reputable broker who can educate you and help you learn about trading.
What is scalping?
Scalping is a method of going in and out of the markets in a very short time frame and making numerous daily trades in small profits.
With the use of this method, exposure is limited to incremental amounts, and even though profits are small, risk is reduced.
How do you trade cryptocurrencies?
Razak said, “Bitcoin fluctuates in lower time frames 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”.
Traders must take note that when they are trading cryptocurrency they must trade frugally and cautiously.
How are commodities traded?
Commodities are very closely traded under the futures umbrella. Commodity symbols expire from month to month, unless you have a recurring contract.
“As with any other asset, applying an educated month-to-month analysis and partnering with an informed broker is the best way to go,” said Razak.