Online Trading of Financial Instruments: It’s Not As Difficult As You Think
Reading Time: 6minutes
Traditionally, trading of financial instruments are carried out through the Exchanges. And only certain professionals can trade at the Exchanges. Not any more. Nowadays, online trading has made it possible for anyone to buy and sell financial instruments leveraging the internet
Online trading is the buying and selling of financial instruments using the the internet. Any one who has a mobile phone and data can buy and sell financial assets from the comfort of his bedroom. Hence, many people are taking to online trading to earn a living.
And for some, it is a business that earns them full time income.
In this post, I shall show you the different types of financial instruments, securities or assets that you can trade online. And highlights how you can go about doing so.
I should also add that most online trading asset or instruments are offered as derivatives, particularly Contract For Difference. Derivatives are instruments whose prices are derived from prices of the underlying asset that they are linked to.
Factors Affecting the Choice of a Financial Instrument
Before discussing the types of financial instruments, let me quickly highlight some important factors that usually affect the choice of financial instruments to trade on.
#1. Liquidity – this has to do with how easily available is the instrument and the number of people that are willing to trade on it at any point in time. The more liquid an instrument is, the easier it is for you to buy and sell.
So in choosing a financial instrument to trade on, consider one with high liquidity,
#2. Volatility – this is the measure of how the price of a financial asset rise or fall given prevailing market conditions. The more volatile an asset is, the riskier it is. And the more profitable too.
Volatility thus, is a two edged sword because it can help you make more money and it can also make you lose all your money. So understanding the volatility of an instrument and knowing how to manage, is an important factor in choosing a trading instrument.
#3. Transaction Cost – Trading on financial instruments and investment in securities generally attract both statutory and commercial cost.
Brokers may charge different fees for different instruments and these may be lower for online trading.
#4. Minimum Deposit requirement – This is an important factor to consider because it impacts on the amount initial capital investment you have to make. The minimum capital investment you need to trade online will normally depend on the instrument and choice of online broker.
Normally, forex and stocks may require higher initial investment than binary options. There are online brokers who require as little as $10.
#4. Macroeconomic Developments – factors like changes in price levels, interest rates, exchange rates and inflation affect the prices of financial assets.
A successful trader or investor is one who pays attention to developments in the macro economy and understands how they affect the asset class he is interested in.
If you pay attention to economic events, you will find for example, that some asset classes are more affected by the negative impact of inflation while others show resilience.
What Instruments Are Traded Online
Any instrument that are traded at the Exchanges are also traded online. These include:
When you buy stock you become part owner of that company. Typically to buy stock at the Stock Exchange, you go through a stockbroker. And the process can be slow and expensive.
With online trading, you still need to open an account with with a broker. However, because the process is automated, you use the broker’s platform to place and execute your trade in a matter of minutes.
Forex stands for Foreign Exchange. It has to do with the exchange of one currency for another currency at an agreed price which is the exchange rate.
The foreign exchange market is the largest and most liquid financial market in the world. Again, the forex market used to be a place where only large banks and investment companies trade.
With Internet, however, ordinary folks now trade the forex market online and make money. This is made possible through the many online trading platforms that are available.
Forex trading is profitable but highly speculative and risky. To succeed requires extensive practice and experience.
Options are contract in which one party agrees to buy from or sell to the other party, an asset at a certain price and at a future date. It is a derivative instrument.
And binary options has become a popular derivative trading instruments. Many online brokers offer binary options trading which simply involves predicting the outcome of the price of an underlying asset. And there can only be two outcomes – up or down, win or lose, etc.
The underlying assets in binary options can be currency pairs (forex), stocks, commodities or indices.
Stock indices represent the value of a group of stocks. It shows the value of Exchanges and varies from country to country. Trading on indices is usually through the CFD. It’s a derivative and hence, very speculative.
Commodities are basic items of consumption traded at the Exchanges as futures. Oil, gold, silver, coffer, cocoa are some of the commodities that are internationally traded.
Many online trading platform provide commodity CFD. These are contracts derived from the prices of the underlying asset which does not give right to ownership of the commodities.
Cryptocurrency generally is gaining popularity as a financial asset class and bitcoin is taking the lead. Bitcoin is the first world digital currency and many online brokers now offer it for trading on their platforms. It’s traded in the same way currency CFD is traded.
Cryptocurrencies are highly volatile and professional traders enjoy trading it because it is profitable.
How to Start Online Trading
Starting out in online trading is not as difficult as you may think. However, not every body who embarks on online trading have the patience the learn, practice and gain sufficient experience to succeed.
Those who do record outstanding successes.
Here’s how you can start online trading.
#1. Decide on the Instrument
What instrument do you want to trade on? The most common financial instruments that people trade online are Forex, Binary Options and Stocks. More advanced traders also add indices and commodities to their trade.
Bear in mind the factors that we have identified as the things that influence the choice of trading instruments. These include liquidity, minimum initial trading capital required and transaction cost.
#2. Open an Account with an Online Broker
Online brokers are very important in online trading. They act as intermediaries and offer the trading platforms.
The online broker you choose will depend on the asset class you want to trade on. To trade forex, choose a forex broker; if stocks, choose a stock broker. For binary options trading, go for binary options brokers.
Most online brokers give you access to a variety of markets including forex, stocks, cryptocurrency and commodities. Derive is one such online brokers that offers you opportunity to trade stocks, forex, commodities and synthetic indices, right from one platform.
Benefits of Using Online Broker
There are a number of benefits you get from opening account with online brokers, such as Deriv.com. Some of these includes, demo account. Such demo accounts give you the opportunity to learn, trade and understand the market before investing real money.
You also have the opportunity to leverage on margins. With margins you can place trades in sums above your capital. While this can be wonderful for experienced traders, it may lead to big losses if used by inexperienced traders.
#3. Download the Trading Platform
We use trading platforms or software to facilitate trades. Most online brokers use the MT4 or MT5 trader. You can download these Apps for free from Google Play Store and Apple Store. Your broker will guide through the set up.
#4. Fund Your Account
Funding your account is easy. Most platforms or online brokers accept funding of account through direct account transfers, credit and debit cards
As a rule start with the minimum funding and build your capital up as you build trading capacity.
#5. Start Trading
It is smart to start with a demo account first. The demo account helps you to do dummy trading during which period of time you would have understood the platform, learn one or two tricks.
Without meaning to do so, many inexperienced people approach online trading as though they were gambling. Trading financial instruments is not gambling. It’s methodical, logical and demands some works of research.
It is knowledge based.
So the first step to making a success in trading is to study and gain a good understanding. Understand how the market moves and have an appreciation of those factors that move the market.
This means that if you are trading and are not abreast with financial and economic developments around the world, then you are yet to start.
Keep your self abreast of economic development is very easy. Just use your valuable time to search through the internet for relevant information rather than ungainly engaging in social media.
Understand that losing is normal in trading. So when you are losing, it is normal to exit, re-strategize and re-enter.
Finally, and this may be the most important. Develop a trading strategy and stick to it. Developing a strategy will encompass fixing a stop loss and profit target levels. A stop loss level is the maximum amount of loss you can take in a losing trade. Once you reach that level of loss, you automatically exit the trade.
On the hand, target profit helps you set the profit level. Once you achieve the level of profit set, you automatically exit the trade.
Setting both stop loss and target profit levels help you develop a disciplined mindset, avoid greed and control your emotions in trading.
Buchi provides small business owners with strategic, financial, and digital support to help them build strong, successful and profitable enterprises. He is a Blogger at night and by day, Team Lead at Stalwart Investment Partners Ltd, a research, business and investment advisory firm.