Market Basics
The following 5 modules look at the 5 major markets for the retail trader. They are Stocks (or equities), Futures, Forex, Options and
CFDs.
The following table outlines some important factors that you the trader need to consider when choosing which markets you want to trade in.
Please be advised that this table is only to be used as a guide or reference tool and any figures used are approximate figures and may not relate
to you.
| |
Leverage & Risk² |
Volatility of market |
Time can be traded |
Opportunities |
| Stocks |
Minimal leverage
1:1 to 2:1#
Stocks can only go to zero so you can't lose more than your
investment"²
|
Low to medium volatility - can gap |
Restricted to exchange
Normally 9:30am to 4:30pm
|
Very large selection
1000's to choose from depending on market or number of markets traded
|
| Forex |
Medium to high leverage
50:1 to 400:1#
You can lose more than your investment (i.e. initial
margin)²
|
High volatility -no gapping with exception of weekends |
24 hours, 5½ days a week |
Very limited selection
Liquidity and low spreads restricted to around 6-12 pairs. Beyond that spreads are
greater
|
| Futures |
Medium to high leverage
25:1 to 100:1#
You can lose more than your investment (i.e. initial
margin)²
|
High volatility - can gap |
Restricted to exchange
Some futures trade 24 hours
|
Limited selection
Around 100 in total, some easier to trade than others
|
| Options |
Leverage varies
You can never lose more than your initial
investment
|
Medium to high volatility |
Restricted to exchange |
Large selection
Will always be less than what the underlying market offers
|
| CFDs |
Medium to high leverage
2:1 to 20:1#
You can lose more than your investment (i.e. initial
margin)²
|
Low to high volatility - can gap |
Restricted to exchange |
Limited to availability
Will always be less than what the underlying market offers
|
| |
Costs^ |
Capital |
Online Trading |
Characteristics |
| Stocks |
Transaction costs relatively high depending on if using online broker or
not |
Require large capital
> $25,000*
|
Yes - restrictions may apply to short trading |
Suit medium to longer term traders and investors. Swing traders and day traders have to factor in
increased costs
|
| Forex |
Nil or low transaction costs and normally limited to spread. Interest costs
depending on interest rate differentials and time position open |
Can start with small capital base
> $10,000*
|
Yes |
Suit swing traders to medium term trading. Short term traders have to factor in
cost of spread as a ratio, high volatility and no central exchange causing short term prices to be random. Longer term must factor in
interest differentials as a cost and the higher volatility longer term compared to equity markets.
|
| Futures |
Transaction costs small to medium |
Require medium to large capital base
> $25,000*
|
Yes |
Suit short term traders to medium term traders. Long term traders can find the
volatility a bit difficult to withstand for a buy and hold approach unless using low gearing, have to factor in expiration
dates.
|
| Options |
Transaction costs small to medium depending on if using online broker or
not |
Can start with small capital
> $10,000*
|
Yes |
Suit short term to medium term traders. Long term traders have to factor in the
time decay and expiration dates unless trading leaps.
|
| CFDs |
Transaction costs range from nil (spread only) to medium depending on market and
market maker. Interest costs can be high depending on whether long or short and current interest rate. |
Can start with small capital depending on markets traded
> $10,000*
|
Yes |
Suit short term to medium term traders. Short term traders have to factor in
prices can be quoted by market maker. Long term traders have to factor in the high costs of interest when going
long.
|
" Unless you purchase stock on margin (see ²).
² In case of loss or if the value of the initial margin is being eroded, the broker will make
a margin call in order to restore the amount of initial margin available. Often referred to as “variation margin”, margin called for this reason
is usually done on a daily basis, however, in times of high volatility a broker can make a margin call or calls intra-day.
Calls for margin are usually expected to be paid and received on the same day. If not, the broker has the right to close
sufficient positions to meet the amount called by way of margin. After the position is closed-out the client is liable for any resulting deficit
in the client’s account.
# These figures will vary depending on the broker and/or exchange.
^ Depends on the broker.
* These are just guidelines. A revenue trader will generally require more than a growth trader because they have to factor in transaction
costs and consider the fact that it is harder to generate consistently higher returns. The larger the capital base the less is required
on a 'return on money' basis.
It is important you pick the correct markets to trade. You need to factor in all the above characteristics when determining
your trading style, time frame, costs and risk tolerance. We're now going to have a more in depth look at each of these
markets.
Move on to Step 3 - Module 1 > Market Basics: Stocks
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