Online trading, from stocks and shares to more complex financial instruments, has experienced an exponential growth in popularity over the past few years. Driven by lockdown boredom and low spending, historically low savings rates, and the effect of social media influencers promoting the activity, the popularity has been such that even the House of Commons Library has seen fit to comment on the rise.
The problem is, trading can be complex, with a truly unforgiving learning curve for beginners. However, with the right guidance and knowledge of the types of trading available, it can become much easier to understand. To help dispel some of the difficulty and aid navigation of the minefield, here’s all the key information beginners need to know.
What forms of trading are available?
There’s a wide range of trading types available. Here are some of the most common, and what they involve:
- Forex – Also known as foreign exchange trading, this sees traders purchasing currencies and selling them, or betting on their rise or fall against one another. This might mean buying Euros in Pounds Sterling and selling them for Sterling when the exchange rate changes and they’re worth more. Understanding and predicting the impact of economic shifts is crucial here.
- Spread betting – This trading activity involves betting on the price movements of an asset, such as stocks, commodities (gold, aluminium etc.), or forex. If you bet the price will go up (or down) and it does, you are paid money by the broker offering the service. If it doesn’t, you lose money.
- Stocks – The traditional form of trading involves purchasing individual stocks of companies (a fraction of ownership of the business), then selling them when the price increases. Stock owners may also be paid a dividend (a small amount of money) by the company if it performs well.
- Contracts for difference – Also known as CFD trading, this sees traders speculating on whether an asset will increase (a long position) or decrease (a short position) over a specific period of time. With CFDs, you open a position (short or long) with a small amount of capital. When the position ends, if you were correct, you are paid the profit experienced by the position. If you were incorrect, you must pay back more than your initial opening capital, in line with the closing position. That’s why you must always have funds to cover potential losses.
Understand what you are looking at
While we’ve gone through the main types of trade above, it’s crucial you read in depth about the types of trading you want to get involved with. If you have the knowledge, you can trade with confidence and make better informed decisions. If you don’t you could lose more money than you put in.
To get the understanding you need, start watching trading videos on YouTube, read plenty of articles like this one, browse forums, and speak to friends who have experience.
Three crucial tips for newcomer traders
Have a plan
Once you know what you want to trade and understand how to do it, spend time crafting a strategy. Look at more guides, consider the timing of your trades, have long-term goals to strive for, and hedge against the prospect of some trades failing.
Set aside funds
Only trade with money you are happy losing. That means you must never invest any funds you need for your living costs, housing costs, or long-term savings goals like buying a house. It’s just not worth the risk.
When you begin trading, don’t go all in. Pick one or two trades and only invest a small amount of money, looking intently to see what happens. With these learnings, you can be confident with riskier trades later down the line.
Do you trade? What helped you most as a beginner? Let us know in the comments section.