Lesson 2
When I first entered the markets back in the mid-80s, investors and traders had little choice but to trade cash instruments. For example, an investor that felt bullish about a particular company could buy the relevant share and wait for the price to rise. So far so good but what if the trader held the opposite view – expected the share price to fall? Investors and traders couldn’t sell shares that they didn’t own – couldn’t “go short” to use the market term.
So traders and investors could exploit a bullish view – exploit a view that prices would rise – but not a bearish view – a significant limitation to the way in which market participants could trade. And there were further problems.
An investor buying (say) ten thousand pounds’ worth of a particular stock had to come up with the full ten thousand pounds – the full value of the shares being purchased. There was no possibility for leverage or gearing – no cash efficiency.
And shares were only really traded on official stock markets such as the LSE or NYSE. As such, stockbrokers held a monopoly on access to shares and charged accordingly. This was one of the key issues addressed by legislation such as MiFID.
Thus investors and traders were limited in a number of ways. By contrast, today’s traders are offered a variety of products and instruments with which to access the markets, products that address the limitations detailed above.
Derivative contracts such as futures can be bought or sold, allowing traders to exploit both bullish and bearish views. And exchange-traded futures are margined – marked-to-market – facilitating leverage (gearing) and allowing traders greater exposure to the market (both profits and losses!).
CFDs – Contracts For Difference – were originally targeted at the retail end of the market – at smaller investors who wanted the ability to trade without needing significant trading capital. Buying shares via a CFD essentially amounts to buying shares with money borrowed from the CFD provider. It is cash efficient and straightforward – an easy way for retail investors to access the markets.
Spread betting companies also allow traders to take a view on the market – essentially taking a gamble on a share rising or falling in price. Trading spreads can be relatively wide – that is, there may be a significant gap between the bid and offer – but like CFDs – spread betting can offer a relatively easy way to access financial markets.
So today’s trader faces a range of ways in which to access the market. Choosing the right product and product supplier comes down to the specific requirements of individual traders, such as their appetite for risk and tolerance to trading costs – and research is key. Potential traders should always do their “homework” before taking the plunge.
Author: Bill Beagles, Head of Training, Professional Trader Qualifications & Development, ZISHI
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Trading Strategy Playbook: Lessons from Trading Trainers
Over the next few weeks, we’ll be sharing key lessons from industry veterans to help traders at all levels sharpen their strategies, improve discipline, and master market dynamics.
Coming Next:
- Lesson 3 | Speculation—Good or Bad?
Is it fuelling market liquidity or creating unnecessary volatility? We break down the pros and cons.
Here’s a look at the articles already featured in our Trading Strategy Playbook: Lessons from Trading Trainers series:
- Lesson 1 | The 5 most common trading mistakes and how to avoid them
Most traders fail by making common trading mistakes. Learn the top 5 to avoid—before you make them—with expert insights from ZISHI.
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