Trading on forex is a means to speculate on the relative values of currencies. Forex trading involves the simultaneous purchase of one currency and selling of another, with the aim of profiting from fluctuations in the exchange rate.
The market is enormous, with average daily turnover of $5.1 trillion, according to the latest assessment of the market. Forex trading is described as being an over-the-counter (OTC) market, which means there are no central exchanges or clearing houses. Because of this forex trading is a truly 24/7 market, with prices moving constantly and gapping is less likely to occur. The forex market is also said to be a principals-only market. To explain, when buying and selling stocks investors will use a broker. Forex trading firms are called dealers and assume risk to make the trade. Rather than charging commission, one of the primary ways brokers make money is on the bid-ask spread.
Forex trading always involves two currencies and is therefore sometimes called a zero sum game. When one currency rises in value by definition the currency on the other side of the cross necessarily loses value.
For retail clients, forex trading means spread betting or trading CFDs (Contracts for difference).
The chief difference lies in the tax consideration – spread bets are free from capital gains tax in the UK, while CFDs are not*.
With spread betting the contract size is determined by the amount of money you are prepared to stake per point. CFD trading involves buying or selling contracts that represent a certain amount per point in the market.
example of the trade size :
Spread betting : 1.0 = £1
CFD : 1.0 = £10
Shares describe a range of different financial tools, but in their simplest format, they refer to the stocks which are offered by every publicly traded company and which are available for general purchase on the financial markets which we know as the ‘stock markets’. All companies listed on financial indices will have shares which can be bought or sold by traders.
What can affect the movement of stocks?
Every stock has its own value, dependent on how the company is currently valued by the markets. Although stock prices are rarely completely static, significant movements in a stock price are often down to a number of specific factors.
1. Companies Earnings
Four times a year all publicly traded companies release their earnings for the previous quarter. As well as providing details about the company’s performance, they can also serve as a strong indicator as to whether a company’s current strategy is working or not. Larger companies may well have their performance tracked by financial analysts who will issue predictions as to the upcoming results of the firm in question (the firm’s stock price can also move once the general prediction is made known.) It is not uncommon to see a scenario in which a company makes a decent profit but falls short of expectations and so sees its stock price subsequently fall. Similarly, a company might announce a loss for the quarter, but if the loss is less than that predicted then the firm’s stock price might rise.
2. Analyst Ratings
Market analysts don’t just provide predictions on a company’s upcoming earnings, they also provide constant ratings on many major stocks, within the following categories; Sell, Underperform, Hold, Outperform and Buy. ‘Sell’ and ‘Buy’ are obvious – a clear indication in either direction. ‘Hold’ implies that the analyst believes that the stock and company in question will show similar rates of movement to the market in general or to other stocks in the same market sector. ‘Underperform’ suggests that the analyst thinks that the stock will do slightly worse than ‘Hold’, whilst ‘Outperform’ suggests that the analyst believes that it will do slightly better.
However, analysts’ ratings should not be accepted in blind faith by traders. Firstly, there is no guarantee that the analysts will be correct. Secondly, analyst unanimity is rare, which means one analyst’s ‘outperform’ might well be another’s ‘Underperform’, for example. Analyst ratings can be useful, but usually it’s best to use these in conjunction with one’s own research.
3. General Industry News
Many publicly traded companies focus on a specific sector, such as technology, food or mining. Sometimes general news about a specific financial sector can have a chain reaction on all companies in that sector. For example, news that copper supply currently outweighs demand is likely to have an effect on mining companies in general and those that focus on copper in particular. Sometimes, however, news about one particular company in a sector can have a knock-on effect on other companies in that same sector.
For example, Tesco’s tough 2014 saw its share price drop drastically, but many of its direct competitors in the UK supermarket industry also saw their stock prices slump. In part this was due to a general malaise which investors perceived within the UK supermarket industry, but which Tesco’s actions and the subsequent fall-out helped to highlight.
Other news which can influence the stock price of a company includes takeover speculation (whether this turns out to be correct or not), changes in top company personnel and significant shifts in strategy announced by the firm in question.
Trading on commodities is a way to speculate on the future price of a physical good such as gold, oil or cotton. Unlike the forex market, commodity trading itself takes place on structured exchanges where a relatively small number of buyers and sellers come together to agree prices.
Whether spread betting or trading on commodity CFDs, you are trading on the underlying market price using a leveraged-based derivative product. Leverage means you can trade on larger positions than you could if you were to purchase the commodity outright. Leverage magnifies profits and losses.
Derivatives mean you can trade on the price without requiring to ever take delivery of the commodity – which it makes it possible for just about anyone to trade on commodities providing you have access to a phone or computer.
At ETX Capital you can trade on commodity futures and commodities with no expiry points.
Indices, or indexes as they are also known, are assets which are grouped together; either representing a specific sector of a market or a market in its entirety. A stock market index’s overall level is calculated by taking into account the current prices of all the different assets within the index; this means that shifts in individual stock prices lead to the index rising or falling in value.
Major Financial Indices
Most major economies (and indeed, many developing ones) have at least one financial index which groups together a series of assets. Major indices include;
Different stock exchanges focus on different types of stocks. Some indices are specifically global (such as the S&P Global 100) whilst others are national, listing only companies which are native to the country in question. Other indices focus only on specific business sectors – the NASDAQ index, for example, only lists tech stocks.
However, there are some multinational corporations which are tradable on more than one index; usually both a national index and an international one. Alibaba.com, for example, can be traded both on Hong Kong’s Hang Seng index and – after a highly publicised IPO last year – the New York Stock Exchange as well. Similarly, Credit Suisse can be traded both on the Zurich-based Swiss Market Index and the New York Stock Exchange. Some financial indices are tradable either in ‘Rolling Daily’ or ‘Futures’ formats, meaning that they can be traded either at their current price or at a price agreed on now for an option which will close automatically on a specific date.