Fred Razak, Chief Trading Strategist From CMTrading, has been trading on the financial markets for well over 20 years. And as Africa’s largest brokerage celebrates its 10th anniversary, Fred answers 10 pressing questions about online trading that internet users commonly ask.
1.What is stock trading?
“Not to be confused with investing in stocks, stock trading is the act of observing price fluctuations on specific stocks throughout the day, and then anticipating and speculating as to future movement in that stock, then taking a pragmatic position (i.e. buying and/or selling short the stock) to make a profit.
“In essence, as a stock trader, you’re looking for patterns and trading signals in the market and taking advantage of price fluctuations – both upwards and downwards. If a stock price drops due to various circumstances but you think it may bounce back in the future, there lies the opportunity to make a profit. It is not an exact science but there are many factors and historical patterns you can reference to forecast future outcomes.”
2.What is options trading?
“Options are contracts that allow you to take the ‘option’ of buying or selling short a on a tradeable asset or choose not to take one. So, you aren’t buying the actual stock, you’re paying for the right to buy or sell the stock. Think of it as putting down a deposit on something – not the full value, that gives you the option to buy or sells something in the future.
“When you buy an option, you base your speculation on the anticipation that the price will increase but, since you have already locked in the price today, you stand to profit instantly when the price trades above your purchase price of the option. You then have the right to trade the asset on that date. But you aren’t obliged to do it. If you decide to trade, that’s called exercising the option.
“Options are traditionally used in hedging strategies in order to reduce market risk.”
3.What is a CFD?
“CFD trading or ‘Contract for Difference’ trading means, you’re not trading the actual asset; rather you’re trading a representation of an asset. In the United States, CFDs are only traded by the major financial institutions themselves, not by retail investors; whereas outside the US, CFDs are quite common and are traded by both.
“A CFD is a simple contract between a trader and a seller. In share trading, if you bought 10,000 shares at R2.00 each, you would pay R20,000. But if you buy a CFD as opposed to purchasing the shares, your broker may offer you a CFD at 10% of that value, with a 10% margin/difference agreement.
With a 10% agreement in place, you are exposed to the same 10,000 shares at just 10% of the price a share buyer would pay. That means you pay R2,000 and if the share price goes up by 5c, you make a profit of around R500 (5c x 10,000 shares = R500). So, you recoup your initial investment plus the difference.”
4.What is leveraged trading?
“Leverage implies the ability to control a larger amount of money based on a good faith deposit. In other words, somebody who opens up an account with R 100 can trade for more than that amount to take advantage of the markets.
“Leverage is a trading mechanism investors can use to increase their exposure to the market by allowing them to invest less than the full amount needed to trade the asset. The trader uses credit provided by a broker so that they only have to invest a percentage of the value of the transaction – BUT – something a trader must always consider is their coverage or risk ratio because the trader is responsible for any losses, not the broker.”
5.What is forex trading?
“Forex trading is very common in the international trading arena. The principle is very straightforward. In fact, the concept is similar to stock trading in terms of watching prices fluctuate and cashing in on those fluctuations. For example, you would have two currencies traded against each other. You buy one and you sell the other or sell one and buy the other.
“Say you’re trading US dollars versus South African Rands, you would buy one currency when its value falls, then sell it against the other currency when the value increases – a simple profit and loss principle.”
6.What is futures trading?
“Futures are a popular way for beginner traders to learn. Futures trading is a sales agreement between a buyer and a seller for the price today and a delivery of the asset in a future date, thereby locking in the price now.
The buyer agrees to buy a commodity (or forex or stock) by a certain date. The seller agrees to provide the commodity at the future date for the price that is quoted today. In futures trading, once the agreement between buyer and seller is finalised, the agreement stands, even if the price of the commodity goes up by the specified date.
“A good example of this is when the price of oil is traded in a contract form. It is done this way to set a basis for global financial stability in the price of oil. If the price of oil is $100 today and you agree to buy it at $100 a month from now, even if it goes up to $150 in that month, you still pay $100.
Conversely, if the price goes down to $90, you will also pay $100. So, either the buyer or the seller could win or lose, depending on the price movement of the commodity. Setting these agreements helps transportation companies like airlines set prices without too much exposure”
7.How do you trade stocks?
“This is a straightforward answer. No matter what you are trading – whether it’s futures, CFDs, forex, symbols indices or anything else – never gamble. Always apply technical analysis before you invest any money. And always work with a reputable broker that can educate you and help you learn.
“Never overextend yourself. Start by taking responsible risks with small investments that are within your comfort zone. Opportunities to get more aggressive and trade larger will always present themselves, but initially you want to build your confidence, both in yourself and the markets. Always start with managing your risk.”
8.What is scalping?
“Scalping is a method of going in and out of the markets in a very short timeframe and making many – even hundreds of – daily trades in small profits. Most of the time, scalpers are looking to be in and out of a trade in seconds.
“Using this method, exposure is limited to incremental amounts, and even though profits are small, risk is reduced. I might even call it ‘intraday’ trading. It’s an effective, time-intensive way of trading that won’t make you a fortune overnight but can pay off with patience and strategy.”
9.How do you trade cryptocurrencies?
“This is the million-dollar (or around 30 Bitcoin) question. Cryptocurrencies haven’t been around for a long time. And most technical analysis is based on limited historical data. So, it’s a little bit harder to finesse exactly what the game entails.
“Bitcoin Trading is volatile and unpredictable. Similarly, in the early 2000s, there was the dot-com boom, which briefly traded like cryptocurrencies are trading today. But the dot-com bubble had a rapid fall from grace. Bitcoin may or may not experience the same volatility but, it is still trying to create a name for itself.
“Historically, Bitcoin fluctuates in lower timeframes and because of the volatility, scalping is one way to potentially take advantage of that and minimise your risk (but this is only opinion, not gospel). Trade frugally and cautiously, not necessarily daily, but potentially enough to produce a steady income stream.”
10.How are commodities traded?
“Commodities are very closely traded under the futures umbrella. Commodity symbols expire from month to month, unless you have a recurring contract – for example, with oil or gold. Sometimes, however, you could just trade the asset itself without a futures contract.
“As with any other asset, applying an educated month-to-month analysis and partnering with an informed broker is the best way to go.”
CMTrading is “Your local international broker” and is a leading provider of derivative trading solutions to the local and international markets. The company, regulated by the South African Financial Services Board, operates successfully around the globe and assists in increasing their clients’ trading knowledge, providing personal service and support as well as a range of online solutions to match every trader’s needs. CMTrading is the brand name of Global Capital Markets Trading Ltd (A Seychelles company, company no. 104785).
For more information on CMTrading, visit their official website at www.cmtrading.com or call +27 10 157 19 89, and one of their friendly staff will assist you.
Summited by The Lime Envelope On Behalf of CMTrading