Market day! A mini tutorial on markets

  • By Harrison Cole

  • July 26, 2018
  • 7:16 pm BST

These days, you can use a myriad of trading instruments thanks to the continuous evolution of technological tools and interfaces. The concept of market share is blurred because there so many markets to talk about. This is because the lines are no longer as clear as buying gold versus buying stocks. You can now purchase that same gold via an exchange-traded fund (ETF) or even a futures contract, and you can at least benefit from the movement in gold prices. This is also available with stocks, currencies and commodities. Let’s look at some of the many markets and trading instruments available.

The various kinds of markets

 The stock market is the obvious starting point. It is the one most traders and even non-traders are familiar with. In their simplest form, profits are made by selling shares in a company.

 Surprisingly, the stock market is not the largest market in the world, even though it is natural to assume this. That title belongs to the forex trading market. Currencies are traded, and this is done in pairs. There are several great currency pairs available.

Forex brings us to contracts for difference, or CFDs, as forex trading is a kind of CFD. They are related to each other in the sense that they are both derivatives, and in both cases, you are not buying the underlying asset (which is currency, in the case of forex). Instead, you are speculating on their prices going either up or down.

When trading CFDs, your deposit is a fraction of the value of the underlying asset, with your profit potentially being many times this. There is also the risk that your losses would be magnified by the same token, and this is why it’s best to learn CFDs after you have mastered stocks. CFDs do not have an expiration date and can be thought of as a stock-forex-options market.

ETFs are also a way to access the market. You buy into various sectors, including commodities and currencies, and buy and sell in the same way as you do stocks.

If you trade options, again you take a position on which way the price movement in an underlying asset will be.

Which market should you trade in?

 Your trading style, goals, time frame in which to meet those goals, available capital, and when you trade are some of the factors that will influence your choice of market.

One of the big trends since 2000 has been a rise in CFD and forex trading, probably because these are leveraged trades in the sense that you do not need to put down the full purchase price. You can open a forex or CFD account for as little as $100 and start trading.

The winning combination making these so appealing seems to be the lack of high barriers to entry, lack of commission payable, high leverage and free trading tools. However, the latter is dependent on choosing the right CFD broker whose platform is amenable to you and who provides you with user-friendly tools that are not intimidating.
If you have more capital, ETFs allow you to partake in forex fluctuations by trading on the stock exchange. You can open a day trading stock/ETF account. On one hand, it will require more capital than CFDs, but the advantages are that ETFs can be leveraged or unleveraged.

There are many more alternatives and variations for getting into or trading a specific market, so what has been discussed here should be thought of as merely a brief overview. We have not even touched on options and futures, among others. As far as trading tips go, the point is that the more you know about accessing and incorporating other markets, the more likely you are to engage in consistently successful trades and to do so with the lowest possible fees and commissions, within a modus operandi (capital and otherwise) that is best suited to you.