Understanding the basics of trading is an essential starting point. Is there a difference between investing and trading? Trading and investing are two different things with a common goal – profit. Trading is a method to achieve current income and investing should develop long-term wealth or assets. Investments are often held for years or even decades. Investors take advantage of certain perks such as dividend payments, coupon payments and/or interest during this time. Trading is the more frequent buying and selling of financial instruments with the aim of outperforming buy-and-hold investments. The clear difference between an investor and a speculator/trader or a trader is the mindset: investors think as business owners, the rest of us merely speculates.
We trade financial instruments. A financial instrument is a tradable asset of any kind i.e. it is an asset we can buy or sell at a monetary value on a financial market. We can trade currency pairs, commodities, stock indices, stock of companies, contract of differences.
The stock market refers to the collection of markets and exchanges where the issuing and trading of equities or stocks of publicly held companies, bonds, and other classes of securities take place. This trade is either through formal exchanges or over-the-counter (OTC) marketplaces.
Also known as the equity market, the stock market is one of the most vital components of a free-market economy. It provides companies with access to capital in exchange for giving investors a slice of ownership. Stocks of larger companies are usually traded through exchanges. Such exchanges exist in major cities all over the world, including London and Tokyo. Exchanges are entities that bring together buyers and sellers in an organized manner. On exchanges, stocks are listed and traded.
Basic rules for Stock market:
- Focus on price
- Stay liquid
- Practice before you start
- Don`t try to out-think the markets
Forex, also known as foreign exchange, FX or currency trading, is a decentralized global market where all the world’s currencies trade. The forex market is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion. All the world’s combined stock markets don’t even come close to this.
Just like stocks, you can trade currency based on what you think its value is (or where it’s headed). But the big difference with forex is that you can trade up or down just as easily. If you think a currency will increase in value, you can buy it. If you think it will decrease, you can sell it. With a market this large, finding a buyer when you’re selling and a seller when you’re buying is much easier than in in other markets.
Forex means trading of currency pairs. You have main, minor and exotic currency pairs you can trade. When placing a trade, we are speculating on which currency we believe will become stronger or weaker against the other with the goal of making a profit from the exchange rate movement. The currency to the left is called the base currency. The currency to the right is called the quote the currency. The quote currency tells us how much it is worth against 1 unit of the base currency. If we say the EURUSD is trading at 1.3000 it means 1 euro equals $1.30.
Major Currency Pairs
All the major currency pairs contain US Dollar on one side. Most traded currency pairs.
Minor Currency pairs
The most active crosses are derived from the three major non-US dollar currencies (the Euro, the UK Pound and Yen).
Exotic currency pairs
Exotic currency pairs are made up of a major currency paired with the currency of an emerging or a strong but smaller economy from a global perspective such as Hong Kong or Singapore and European countries outside of the Euro Zone.
An option is a derivative because its price is intrinsically linked to the price of something else. A major advantage of options is their versatility. They can be as conservative or as speculative as your investing strategy dictates. Options enable you to tailor your position to your own set of circumstances. If you buy an options contract, it grants you the right, but not the obligation to buy or sell an underlying asset at a set price on or before a certain date.
Options are contracts in which the terms of the contract are standardized and give the buyer the right, but not the obligation, to buy or sell a particular asset (e.g., the underlying stock) at a fixed price (the strike price) for a specific period of time (until expiration).
The buyer of an equity call option has purchased the right to buy 100 shares of the underlying stock at the stated exercise price.
The buyer of a put option has purchased the right to sell the number of shares of the underlying stock at the contracted exercise price.