For the inexperienced, there can seem to be a bewildering number of ways to trade your money. Technological advances have made these more accessible than ever, with the best trading platforms now available on PC, mobile phone and tablet. So what are the choices out there for the would-be financial trader?
Stocks: The go-to choice for many first-time investors. Buying shares on the traditional markets can offer good long-term returns, though it is worth considering some of the other trading vehicles on offer.
Contracts for Difference: Contracts for Difference (CFDs) are a financial derivative. The contract is an agreement that one party will pay the difference in price from when the contract was opened to when it was closed. CFDs offer a way to trade the markets without having to purchase the underlying asset. This allows traders to go short as well as go long on an asset, making CFDs a popular choice for hedging portfolios.
Trading CFDs gives you access to leveraged trading, meaning you can gain a far larger exposure to the market than you would with other forms of trading. This isn’t without its risks, however, as you can end up losing more than your initial deposit. You can find out more about how CFDs work here.
ETFs: ETFs (Exchange Traded Funds) track financial instruments such as commodities, bonds and indices. The price of an ETF fluctuates in a similar way to a traditional stock and is traded like a security. An ETF is created when a fund that owns particular assets splits itself into shares that are then sold to shareholders. Owning shares in ETFs entitles you to interest distributions, dividend distributions and capital gains distributions.
Forex: FX trading gives you access to the largest, most liquid market in the world. Unlike other markets, FX is decentralised so runs 24 hours a day, 5 and a half days a week. Forex trading is well suited to day traders looking to profit from sharp price movements.
Options: An option is a security just like a stock or a bond. It gives the buyer the right to buy or sell an underlying asset at a specific price, on or before a certain date.
A ‘call’ gives the holder the right to buy an asset at a certain price within a specific period of time. Calls are similar to going long on a spread bet or CFD trade. When a trader buys a call, they are speculating that the value of the stock will increase between the time of purchase and when the option expires.
A’put’ gives the holder the right to sell an asset at a certain price within a set period of time. A ‘put’ is similar to holding a short position on a spread bet or CFD trade. When a trader buys a put, they hope that the price of the security will decrease before the option expires.
There are some notable differences between European and American types of options trading.
Spread Betting: Spread betting bears many similarities to CFD trading. Instead of buying lots, you place a stake per point and profit (or incur losses) depending which direction the markets move in.
Financial spread betting is not permitted in many countries. It is popular in the United Kingdom and Ireland, however, where it is exempt from UK Stamp Duty and UK Capital Gains Tax. This can potentially pass on large savings to traders, depending on their personal circumstances.
You can learn more about financial spread betting here.
How to choose? This will depend on the amount of money you want to invest and the style of trader you are. It can also depend on the country you reside in. For example, residents of the United Kingdom and Republic of Ireland may benefit from tax advantages when spread betting. However, spread betting and CFDs are not permitted in countries such as the United States.
Risk warning: Spread bets and CFD trades are leveraged products. Losses may exceed deposits.