Trading is the act of buying and selling financial instruments with the aim of making a profit, and involves speculating on the price movements of stocks, currencies, commodities, indices, and other assets. Trading typically involves leverage, meaning you can control large positions with a relatively small amount of capital. However, leverage can amplify your losses as well as your profits, meaning careful risk management is advisable. Traders use a variety of strategies and tools to predict whether an asset’s price will rise or fall. These can include fundamental factors such as macroeconomic drivers or technical influences such as key support and resistance levels.
What are CFDs
Contracts for difference (CFDs) are a popular way of trading on the price of cryptocurrencies, stocks, indices, commodities, and forex without owning the underlying assets. Instead of buying the asset (as you would when investing), you trade on the rise or fall in its price – usually over a short period of time.
Essentially, a CFD is a contract between a trader and a counterparty (sometimes a broker, sometimes the market itself) to exchange the difference in value of an underlying security between the opening and closing of a position.
With CFDs, you can profit on a market by speculating on its price rising (known as going long) or on its price falling (known as going short). And because a CFD enables you to trade using just a fraction of your position’s value – known as trading on margin or leveraged trading – you can open larger positions than your initial capital may otherwise allow.
Stocks/Shares
What is shares trading?
Shares trading is the process of buying and selling company shares in the hope of benefitting from price fluctuations. You can buy and sell shares directly on a stock exchange or trade over-the-counter (OTC) derivatives on their prices.
Traders generally aim to capitalize on short-term market moves. They may buy shares they expect to go up, hold them for a short period, and then sell once the market rises. That differs from traditional stock investing, which involves buying and holding shares for the long term. As with all trading and investment products, there is always the possibility of loss as well as gain.
Why trade shares?
Shares are among the most popular markets to trade. They offer a way to gain exposure to a singular company’s performance and also to global economic health. Trading CFDs on shares gives you the opportunity to go short as well as long, without having to physically buy the underlying.
You can also access leverage to amplify your exposure. This can magnify your profits but also your losses, as both will be based on the full value of the position.
Index
What is indices trading?
Indices are financial instruments that track the performance of a group of assets, such as equities. So trading on indices means getting exposure to a whole group of assets with a single trade.
By tracking the performance of a large group of shares, a stock index aims to reflect the state of a broader market. There are stock indices that represent the stock market of a whole country, such as the S&P 500, and those that represent a specific sector, such as the NASDAQ Biotechnology Index, which consists of about 200 firms in the biotechnology industry.
This means that indices tend to be diversified, and you’re effectively getting access to a whole sector or economy with a single trade. Those who are new to financial markets often start with index trading rather than a specific stock or other asset.
Why trade indices?
As an index is a measure rather than a tangible thing, it cannot be bought outright: you cannot buy a portion of the FTSE 100, for example. Instead, you’d need to buy shares in all of its constituent companies in the representative proportions.
Trading makes indices more accessible, by giving you exposure to their price movements without having to own any of their constituents. This means you can get exposure to an entire sector or economy with a single trade and instantly diversify your portfolio. As you’re not owning the underlying asset, you can also go short as easily as long. Many trading providers continue to price indices after the market closes, too, meaning they are tradable 24 hours a day, seven days a week.
Forex
The term ‘forex’ is short for foreign exchange. Forex trading is the process of buying and selling international currencies, with the objective of making a profit from fluctuations in the exchange rates between them.
So you might trade the euro against the US dollar (EUR/USD), for example. Buying the EUR/USD pair means that you are effectively speculating on the euro to increase in price against the dollar. Most currency pairs are priced to the fourth decimal, so a single point (pip) of movement relates to the fourth decimal place.
Why trade forex?
The FX market is the largest in the world by global trading volume. It’s open 24/5 and extremely liquid, so you can normally enter and exit trades whenever you want to. The high liquidity also means that spreads tend to be tighter than some less-liquid asset classes, so the underlying market won’t have to move too far in a positive direction before your trade is in profit.
While movements in the currency market can be small – less than 1% average daily movement under normal trading conditions – the fact that they are traded to the fourth decimal creates a very fertile trading environment. Leverage offered by trading providers can also amplify retail traders’ exposure by up to 200:1. This means that small moves in the underlying can create large profits or losses.
Commodities
What is commodities trading?
Commodities trading is the buying and selling of raw materials or primary agricultural products. There are hard commodities, which are generally mined natural resources like gold or oil, and soft commodities, which are livestock or agricultural goods.
Commodities trading predates all other forms of trading, as burgeoning civilizations would barter for food and supplies. In modern times, the physical commodities market is hugely dependent on futures prices, enabling producers (such as farmers) to secure a price from buyers in advance.
However, the sophisticated network of commodities exchanges that exists today enables speculative traders to access the price movements of these assets in the short term.
Why trade commodities?
Trading on commodities gives you exposure to the prices of oil, gas, metals, and more, without ever having to take physical delivery of the asset or worry about storing them. Unlike futures contracts, CFDs do not have a specified expiry date, giving you flexibility on when you close your position.
Many investors view commodities as a potential hedge against inflation, as their prices are not highly correlated with other assets. Gold in particular has historically been considered a safe haven, as it tends to retain its value during times of economic uncertainty.
Trading CFDs on commodities also enables you to use leverage to amplify your exposure. This can magnify your profits but also your losses, as both will be based on the full value of the position.
Cryptocurrency
What is cryptocurrency trading?
Cryptocurrency trading involves taking a position on the rising or falling price of digital assets such as bitcoin and ether with the intention to profit, using derivatives such as CFDs. This method is the same as when you trade more established asset classes such as shares or commodities, in that you’re only trading the underlying price of the asset rather than owning it outright.
CFD cryptocurrency trading is typically undertaken using leverage, giving you access to the full value of the position with only a relatively small outlay, known as the margin. Leverage amplifies both profits and losses beyond your initial deposit, making trading on margin risky. An alternative way to take crypto positions is by physically buying the digital currency using wallets and exchanges, although this means you can’t speculate on its price falling, and have to put up the full value of the position in order to invest.
Why trade cryptocurrencies?
People trade cryptocurrencies for a variety of reasons, from the strong profit potential they perceive, to diversification, to its decentralized nature and the accessibility of its 24/7 market. Assets like bitcoin have seen periods of extreme volatility in recent years that have been highly publicized, making them infamous in popular culture and broadening their speculation appeal. Some also see cryptos as a potential hedge against fiat currency risk or inflation, and others appreciate the innovative blockchain technology that underpins them.
What is Margin/Leverage ?
Margin and leverage explained
Leveraged trading, also known as trading on margin, refers to your ability to control a large position with a relatively small amount of capital. When you trade CFDs using leverage, you’ll only need to put down a fraction of the total trade size to open a position, known as the margin, while being exposed to the price movements of the whole position.
For example, a margin of 5% means you’ll need at least 5% of the total value of the position on account. The remaining funds are effectively advanced to you by the broker.
Let’s say you want to make a long trade on a single $100 stock at 5% margin. Your margin requirement is $5. The stock goes up to $105, and you close the position. Your profit is the full $5, minus fees, despite only putting down 5% of the value of the position.
Now let’s say the stock falls in price to $95, and you close out. Your loss is also $5, despite only having $5 on margin.
Trading with leverage means you have the potential to profit and lose amounts that exceed your initial deposit. Because of this, it’s important to trade with caution and have a solid risk-management plan in place.
Margin requirements differ depending on the market you want to trade. The lowest margin requirement ratio we offer currently is 0.05% (max leverage 200:1). You can check the margin requirements of the instrument you are trading on our asset pages, like our gold price page.
It’s worth noting that if the equity in your account falls below a certain level, you’ll get a margin call requesting to fund your account or reduce the size of your position(s). In extreme cases, if you don’t take action, a broker may be forced to close your positions.