Both trading and investing can be categorised as using money you already have to create more money. One of the key differences between trading and investing is duration. Investing is seen as longer term in nature.
In this context, longer term usually means several months upwards to several years or even decades. Investing often has a specific purpose, for example, saving for a pension. There are many different ways to invest and save, over and above cash holdings. Stocks and shares are a popular way of investing for the longer term. You are investing in a specific company because there is something you like about that company, maybe new products, profit growth, new markets, dividend yield, and so on.
Companies with a track record of profit growth and potential tend to increase in value. A popular investment, certainly in the UK, is property. Both residential and commercial property can be considered as investments. Both can offer capital appreciation and an annual return in the form of rental yields. The downside can be unpredictable maintenance costs.
Another category of investment is collectibles. There are many different forms collectibles can take, such as art, antiques, classic cars, fine wine, coins and stamps, etc. You may choose to invest in these for other reasons, such as in interest in classic cars. Or it may be the beauty of art and antiques gracing your home and quietly appreciating in value.
Let’s look now at trading. One of the key differences between trading and investing is duration. Trading is short term. Short term can mean just minutes, hours or days. Trading is deliberately buying and selling in order to generate a profit.
Stocks and shares can be traded short term. You no longer have an interest in a specific company, it’s growth prospects or dividend. You care more about the likely price movement over the next few hours or days. The name given to people who trade shares like this is traders. Property. Both residential and commercial property can be traded. The name given to property traders is real estate agents. In the same way, collectibles are traded by professionals. There are art and antique dealers, often specialising in certain styles or specific artists, car dealers or garages, wine merchants, coin and stamp dealers and so forth. Trading in collectibles is normally done as a business, requiring business premises as physical objects are involved, plus an interest, knowledge and experience. In much the same way, being a financial trader should also be treated as a business, although you won’t need business premises.
As trading is buying and selling to make a profit, you are always concerned with the price you pay and the price you charge for something to make a profit for the business. A slight change in terminology from trading to being a trader. Trading is deliberately buying and selling in order to generate a profit. As we’ve already seen, traders in physical assets are given specific names and categorised as such. Trading in financial products is something anyone can do from home. People trading financial instruments are just called traders. As a trader, you buy something because you expect to sell it at a higher price to make a profit.
You speculate on the future value being higher or lower than it is at the moment. The largest market on the planet is Forex. Sometimes abbreviated to FX, Forex stands for foreign exchange, or trading currencies against each other, speculating on currency movement in the markets. Other financial instruments can be traded, including shares in companies on many stock markets around the world. Stock market indices can also be traded, for example, the Dow, S&P, FTSE, DAX and so forth. Commodities, including gold, oil and agricultural products such as corn and rice are also heavily traded. When considering whether to trade or invest, it is likely you will want to do both. You are likely to have both long term and short term financial objectives.
Invest for the long term, or capital growth. Trade for the short term, or income. You don’t need to stick to one thing when trading or investing. But dealing costs should be considered carefully. Stocks and shares are relatively low cost, whereas you are likely to pay a much higher proportion of the value of an asset to buy and sell fine art or property. Another consideration is liquidity.
By that, I mean how quickly could you realise the value of your investment? Trading is electronic and no physical product exchange takes place. A property could take weeks or months before you could realise your cash. Liquidity also means the number of buyers for your investment. Except for the very smallest companies, stock market liquidity is always there. Forex is guaranteed as long as the market is open, as you are always holding cash.
Finding a buyer for a piece of art or a property may take some time. Leverage is a normal consideration for property investment. As a buyer, you provide part of the finance in the form of a deposit, perhaps 20%, and obtain finance for the remaining 80% in the form of a mortgage. Leverage is not always offered on other investments, but is normal for trading the financial markets. You will often be asked for a 5 or 10% deposit on shares. The deposit on currencies, as they are cash, can be a fraction of 1%, making it possible to build a large portfolio with a smaller amount of money.
One way of looking at a demo Forex account is as an account to practise trading. You will need to apply to a broker to open a demo account. The broker will normally want to know who you are as part of this process. The main thinking behind a demo account is to allow you to try out the trading facilities before committing to a broker and a trading platform. Many brokers in the Forex community use MetaTrader 4 as their trading platform. Once you have applied for the demo account, your next step is to download and install MetaTrader 4.
MetaTrader 4 is free software and is probably the most widely used trading platform amongst retail traders. With a demo account, you will be given a sum of virtual money for your virtual trading. You can choose both the amount of money and the currency for your virtual trading funds. Your demo account has live access to the markets and provides real time pricing, allowing you to enter and close trades without any risk of financial loss. You can become familiar with the look and feel of the software in your own time. There are some pros and cons in using a demo account. One of the negative aspects of a demo account is that it is not real. This is simulated trading. There is always one significant element of a trade that is absent.
Money. Sure, you won’t lose any money. But you won’t make any either. Money is the single most important element of trading, as it is inextricably linked to your emotions. By not having an emotional involvement, you will be prone to do things differently in a demo account to a live account. My personal view is that you must understand trade sizing and risk management before you start trading. With this understanding, you should consider using a Forex micro account for your practise, staking the minimum amount of money allowed. Yes, you will take some small losses. At least, you’ll know what it feels like and how you behave under those circumstances and you’ll learn to recognise the part your emotions play in trading far more effectively.
Having said that, a demo account can be a useful way of testing a new strategy. For any testing, you will need to be very disciplined and record your results as if you were trading with real money. A demo account may also be helpful as a training tool. If you don’t have and understand some clear trading strategies, you shouldn’t waste your time playing with a demo account.
No realistic strategies, or trying to work one out as you go along means you shouldn’t be considering trading. A word on addiction. I’ve met people who have become addicted to their demo accounts and have been using them for months and months on end. The turns the demo account into nothing more than a glorified computer game. They are no nearer to trading now than they were at the outset. A demo account can never be a substitute for training. By all means, use a demo account to become familiar with the trading platform. Realistically, how long will that take? A day or two? Maybe a week? It shouldn’t be any longer. Many brokers apply a time limit on their demo accounts, meaning they become inactive after a month or so. If you reach this time limit, maybe trading is not for you.
You can apply to open a Forex account with many different brokers. Accounts can be denominated in different currencies. It would be normal to have your account in the same currency as you use day to day. Once your account has been opened, you deposit your trading funds into this account. This video follows “What is Forex” and uses terminology introduced by that video. A link to “What is Forex”.
Having deposited funds into your account, you’ll buy and sell currencies to profit from the movement in exchange rates. The account currency is not significant in this process. As an example, my trading funds are held in British pounds. But I can trade any currency pair offered by my broker and I don’t have to do anything special. Currency is purchased in lots. One lot is 100,000 units of the base currency, which is the first named currency. For example, buying 1 lot of Eurodollar means buying 100,000 Euros, as Euros are the base currency.
As you’ve already seen in “What is Forex”, leverage determines the deposit. Leverage of 100:1, means you’d need a deposit of €1 for every €100 you purchase. Forex accounts are given names. A standard account trades with a minimum trade of 1 lot, or 100,000 of the base currency. Mini accounts are where many traders start. The minimum trade size is a tenth of a lot, or 10,000 units of the base currency.
With leverage, this means trading smaller amounts with correspondingly smaller deposits. The trade size increment is often 1,000 of the base currency. So you could trade 10, 11, or 12 thousand units of the base currency. Micro accounts are great for traders with limited trading funds. The smallest trade size on a micro account is a hundredth of a lot, or 1,000 units of the base currency with increments of 1,000. In practice, with leverage as high as 500:1, a £1,000 trade can be taken with a £2 deposit. Let’s work through an example. I’ve deposited £10,000 into a Forex Mini account. Suppose I’m trading Eurodollar and I believe the exchange rate is going to rise. The broker shows me the prices at which I can buy and sell this currency, buy at 1.2520 and sell at 1.2518. The price has just moved, which normally happens when you are preparing to trade. I’m going long on Eurodollar, which means buying the currency. The amount you trade is determined by the process called trade sizing.
The calculation is a bit of fun, with 10,000 British pounds, wanting to buy Euros using US Dollars, without taking on too much risk. Delegates on Plan B’s Trading 101 training course receive an Excel spread sheet which shows exactly how much to purchase. I input the price at which I am going to buy the currency and keep my risk to just 1% of my capital, or £100. At the current exchange rate, where £1 is $1.5820, the spread sheet suggests I buy 0.79 lots. As I buy the currency, my position is shown along with the original purchase price, 1.2521. The current price is shown, 1.2519, which is the price I would receive for these Euros if I sold them now. A running profit and loss is shown too. I’m currently down 2 pips. With 79,000 Euros, this translates back to £9.98. Let’s watch this as the price changes.
Notice as the price increases, my P&L position improves. Now the price has moved 2 pips, I’m breaking even. Each pip of price movement is worth £4.99 at this trade size. As the price continues to move in my favour, the profit on the transaction grows. The price has moved 7 pips above my entry price now. The running P&L total is shown in pounds sterling, my account currency. The transaction has reached my target of 20 pips profit.
I’ll close the trade now and bank the profit. 20 pips of price movement didn’t take long in this video. There will be times when the market is even quicker than this video. Let’s run through the trade. When I closed the trade, there was 20 pips of profit, the price having risen in my favour as I’d bought the currency. This adds up to £99.87, as I bought 79,000 Euros. Had I bought more, my profit would have been higher. If you really want to do the maths, it goes along these lines. Buying €79,000 required $98,915.90 US Dollars on opening the trade.
Closing the trade and selling €79,000 created a sum of $99,073.90 US Dollars. The difference between the two leaves a profit of $158. The profit is exchanged into the account currency of British pounds at the current exchange rate of 1.5820, which means a profit of 99.87 British pounds. This trade is the equivalent trade to the one in the video “What is spread betting”, which means you can compare spread betting and Forex accounts.
It is possible to make losses in a Forex account when prices move against you. You need to understand risk management fully, plus the use of stop losses and targets. It’s not just when prices are rising that you can make a profit, you can profit just as easily from falling prices by short selling.
Ever since the dawn of civilization humans have been busy with commas.
Things money and yes ideas to represent a profit but traders Each time these are exchanged between parties, no days investors Trade in stocks indices, commodities and options And it works, they invest in relative value of national currency And they can do this anytime and anywhere Compared to other trading markets, Forex is certainly the largest.
If in the New York Stock Exchange an average of twenty three billion dollars Exchanges hands each day, in Forex you can depend on a daily volume 5 Trillion, and since there is no central clearinghouse for all those Forex deals You can trade around the clock, whenever a market is open in any financial capital In the world.
How do you do that? You need no more than a PC or mobile with a Connection to the internet, open account with any broker whose charges are low And make sure you’re getting leverage, that way your profits will be amplified To considerable return, because Forex fluctuations are small Your broker provides the Free Software there should be no commissions And what you earn is your take home profit.