Beginner’s Guide to Fundamentals of Trading
Mainly, a trader buys and sells goods with the aim of making profits. That is, buy for less but sell for more. What and how don’t matter, but when you choose to buy and sell goods, will determine whether you are trading or merely investing in that product or service.
Let’s dig into the details. To fully understand the basics involved in trading, you should know the difference between investing and trading. Financial experts define trading as buying commodities, shares and sometimes even currencies just to sell them later to gain short or medium yields.
Meanwhile, investing is a gradual process aimed at increasing net worth by buying and holding investible financial instruments such as bonds, stocks, and mutual funds. Investments take years (sometimes decades) to be profitable since they tied with factors like interests of the dividend payments and coupon payments at a specified period.
Time creates change which correlates with growth. Hence, commodities, shares, and currencies grow in value after a certain period (time). Therefore, a trader studies the market value of such entities and focuses on the ones that will appreciate quickly in the market. If you purchase an entity whose value takes a long time to increase, then you will be investing in that commodity rather than trading.
You can earn fast money in trading by merely taking advantage of the rising and falling market prices. This business is highly volatile, with very high risks. Still, if you are careful, you can be another billionaire on the planet like George Soros (Net worth: US$ 24.2 billion) who made all his earnings through trading.
How to Start Trading
You already off on a good start if you are reading this article. Most people hear stories that trading is a cash-cow with lots of monetary benefits. Hence, they recklessly jump right into it and end up losing a large sum of money. It is important to know all the basics of trading if you want to be successful, and that is precisely what you are going to get from this piece.
Here, you will get to know the following fundamentals;
- The key factors of trading
- The financial entities you can trade
- The concept of buying long and selling short
- The trading platforms
The Key Factors of Trading
As aforementioned, trading has many risks, and in a way, you can lose all your money in a matter of hours. Thus, there is a need to know the main factors you should consider. As a trader, your goal is to gain profits at the shortest time possible. This is the point where you should understand the cycles of trading and knowing the right time of the day to trade.
The market cycles include:
- The Accumulation Phase
- The Mark-Up Phase
- The Distribution Phase
- The Mark-Down Phase
A cycle can last anywhere between a few hours or days to a few weeks, depending on your preferred financial instruments. Also, don’t forget about the Presidential Cycle. Before the election, the election period, after the election and the president’s term in office affects almost all financial instruments in the market. For instance, interests usually decrease during the election year. So, you should know how to schedule your trades to profit during such periods.
The Financial Entities You Can Trade
Financial Instruments are assets you can trade in the financial market. It is an entity you can buy or sell in the trading process. Examples include;
- Currency pairs (the foreign exchange, also the FX market)
- Stock indices
- The stock of companies (also known as individual equities)
When trading with financial instruments, you don’t really take ownership of the assets. What you actually do is predict the price of the futures contracts for currency pairs and Contracts for Differences (CFDs) in the case of stock indices, shares, and commodities. Contract price varies across all financial instruments whereby any slight change of the asset’s cost will result in a similar relative change of its contract. Financial experts recommend trading of futures contracts and CFDs because they can be traded quickly and are cost-effective.
The Concept of Buying Long and Selling Short
Buying long is a term commonly used in the trading business to refer to buying of a financial instrument. When hear traders are buying long (also going long) means they want the value of that instrument to rise. Example, buying a share at $7 then sell it for $10, you will have made $3 from that share – that’s buying long.
Selling short is a technique where traders can benefit when the market value of an instrument falls. If you don’t own an asset you speculate would fall in value, you borrow it from someone who does. After obtaining the shares, you can sell it with the current market value. Suppose you were right and after some time the price of the given share drops in value, you can buy back (the price would be lower than the time you borrowed the share) and return it to the owner.
For instance, if the current market price of a share is $2000 then the value drops to $1200 in, let’s say three weeks, you can make $800 at that period. But you have to be sure the market value would drop to get profit. Worse, it would be if the market value rises. Thus you will be forced to repurchase the shares at a higher price since you have to return to the owner before the specified time.
Important Note: You don’t have to look for someone who owns a particular to borrow a share, brokers make everything ready for you. All you have to do is press Sell or Buy!
The Trading Platform
The revolutions on the internet have simplified trading in so many ways as compared to the old times. Nowadays, you can access brokers online can trade in various trading platforms they provide you for each financial instrument. If there is an internet connection, you can access these platforms on any device – whether its PC, smartphones or even tablets.
Like any website, trading platforms differ in functionality depending on the ease of operating its interface. You must consider a site with a wide range of features, and it is easy to navigate. It’s a bonus if you can communicate with the broker on-one-one sessions to direct you to the best deals. Please don’t make a deal unless you are sure it’s promising.
Trading is straightforward but have so many variables to consider before you can accumulate profits. Since it’s a repetitive process, you can get the hang of it fast, and you will be making money like it’s a walk in the park. More, brokers can help you access profitable shares to trades.
Still, you have to be careful of frauds who will sweet talk you to a deal that’s infertile. Once you learn all the basics of trading in this article, you will be able to spot a fraud broker a mile away before they reach you. Please don’t forget learn about charts and trading patterns in depth to fully understand all the fundamentals of trading.