Unfortunately, trading isn’t right for everyone. Not only does it come with a number of inherent risks, but it also requires the trader to know their market and it’s potential. While some forms of investment are as simple as handing over money and waiting for a return, trading is a complex form of investment that can bankrupt anyone who doesn’t know what they are doing.
Trading vs. Investing
One common mistake is to consider ‘trading’ and ‘investing’ as the same thing. These are two completely different things that involve working with the same types of financial instruments. Investorsaccrue assets for long-term value in hopes of profiting over time. Their aim is to build a portfolio and then leave it alone to gain as much value as possible. Traders on the other hand constantly buy and sell stocks, bonds, and derivatives to make a profit immediately. Trades yield less profit but offer faster returns, and typically require more work.
Are You Good with Numbers?
Investment of any sort requires you to be good with basic maths, but financial trading requires that you not only be able to put two and two together, but also that you be able to anticipate what the markets are going to do. Trading in stocks, bonds, or derivatives requires that you pay attention to real time hourly trades, daily charts, and multiple time frames, although you should most likely only invest in one. So, for example, if you choose to trade on hourly charts, you should also pay attention to day charts to ensure that you get the full picture.
Can You Accept Risks?
Another thing to consider is that trading is all about risk. If you make a trade and you lose, then you lose money fairly quickly. Traders have to be willing to accept inherent risks, especially when trading derivatives where there is an essential amount of risk. Anyone without the mental or financial ability to sustain risk or loss has no real business financial trading. For example, while trading derivatives like options lowers initial cost, it can increase the risk exponentially. Purchasing 100 options on stock typically costs less than 20% of the cost of the stock itself, yet if all goes well, it can net the investor as much as 70 or 80 percent in returns. By the same risk system, a stock option purchased for $3 may just as easily fall to $1 rather than rising to $5, meaning that the investor loses money.
Financial trading is a complex pastime that requires research and study. While it is by no means necessary to become an investment expert, it is necessary to have a good idea of how the market works in order to understand and estimate it better. Even for traders who plan on handing most of the work off to a stock broker or investment specialist, it is still important to understand how trading works.
Financial trading is definitely not for everyone, and for the most part, it is really only suitable for people who have the extra money to invest. Because of inherent risks, it is never a good idea to step into a market in an effort to increase your kid’s college fund or your own retirement fund. Unless you have expendable money with which to invest, trading is not a good idea.
On the other hand, if you do have the money to spare, take your time to learn your market, and then get started trading. Whether you start out with stocks and bonds or OTC derivatives is up to you, but just make sure that you’re prepared for the risk and prepared to study your market as much as possible before spending your money.