Stock Market Trading -
Fears, Aspirations and
Getting Started
The stock market offers
a plethora of
opportunities for
trading. Apart from the
main securities, which
one can trade on various
exchanges like the
London Stock Exchange,
New York Stock Exchange
and Nasdaq, there are
other forms of trading
like forex trading,
currency trading,
futures, and contracts
for difference also
known as CFDs.
Stock market trading
normally involves
opening a trade by going
Long (buying) or going
Short (selling). The
latter has been possible
only in the last few
years. One can today
sell a stock with the
aspiration that the
stock goes down and buy
it cheaper at a later
time, thus making profit
as a result of the
diminishing of the stock
value.
Greed and Fear
Stock market trading can
be very profitable but
if not mastered
correctly can lead to
heavy losses and being
wiped out especially in
the current
hyper-volatile market
conditions. Various
psychological factors
can affect the way one
trades. The most
pre-dominant ones are
greed and fear. Greed
kicks in when your
system directs you to
exit a trade but rather
than exiting, one
remains in the trade
with the hope of closing
the trade at a better
price. On the other
hand, fear is also a
very dangerous factor
which can lead to
exiting trades when the
time is not right, or
exiting trades too
early.
The best way to keep
these feelings away is
to follow your system
vigorously. In order to
fully trust a system, it
would first need to go
through a lot of testing
in order to seed in
one's mind the thought
that the system works
and is completely
reliable. It is only
when one is totally
convinced of this that
when the feelings of
greed and fear rise,
they are controlled and
ignored.
CFD Trading
One very interesting way
of trading is CFDs
(contracts for
difference). Rather than
buying and selling the
actual shares, one would
enter into a contract
with a broker to buy or
sell a particular share
at an agreed price. The
price would still be the
market price at the
current time, and the
speed of transactions is
similar to the speed of
actually trading the
shares, i.e. a few
seconds. One of the
advantages of CFDs is
the ability to trade on
margin. Some brokers
offer very competitive
margins where, for
example, with a capital
of $20,000, one could
trade shares for a total
of $100,000. This can be
very dangerous and is
only advised to the
professional market
players.
Contracts for Difference
- how they work
A contract for
difference (or CFD) is a
derivative product that
allows an investor to
speculate on movements
in share prices without
having to own the actual
shares. CFDs can be
either "long" (where the
investor anticipates the
underlying share price
will rise) or "short"
(where the punter bets
on a fall in the price).
In general, CFDs are
taken out for amounts of
$10,000 upwards.
Purchasers of CFDs will
only pay a fraction of
the face price of the
deal up front as a
deposit or "margin" -
most brokers require
between 10 and 20 per
cent of the value of the
transaction. They also
pay commission although
this tends to be charged
at lower rates than
commission on
conventional trades.
Gains are subject to
capital gains tax. The
nature of margin trades
means that gains are
magnified - because you
receive the gain on the
full value of the
contract, not just of
the margin.
However, losses are
similarly magnified. If
you have bet on a share
price gain and the stock
suffers a sudden fall in
price, your broker may
require you to lodge
additional money against
the contract. A delay in
doing so can see your
account sold before
prices have a chance to
recover leaving you with
the bill for the
resultant losses.
Technical Analysis
Hundreds of technical
tools exist for traders.
Various software systems
can display a stock's
chart in real time,
enabling you to draw
trending and trading
lines, include
calculations like moving
averages and ratios, and
some can even predict
the price based on a
combination of factors
and previous training
and testing cycles.
Charts
Charts are a must for
most stock traders. A
chart tells the story
much more than words do.
By looking at a chart, a
professional trader can
diagnose the condition
of a particular stock,
just like a doctor does
with his patient. Adding
some analysis tools to a
chart can further help
in understanding what is
going on with a
particular stock.
On charts one can
determine whether a
stock is overbought or
oversold, whether a
stock is reaching a
support or resistance
level, is heavily in
demand and short of
supply or vice versa. As
a result of these
factors and many others
which one can include in
a system, a decision to
buy, sell or exit trades
can be taken.
Stock market trading is
a high return job for
those who are serious
about it. Various
methods exist and some
degree of research is
required before one can
start trading for a
living.
The author is a banking
professional and http://www.contracts-for-difference.com/trade-cfds.html
cfd trading expert. He
writes on various topics
including share dealing
in UK equities and
contracts for difference
trading.
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