What is financial trading? And should you do it?

If you’re reading this, then you will at the very least be somewhat aware of financial trading.

Whether the movements of the FTSE are on the news again, Leonardo DiCaprio shouting down the phone in a film, or someone promoting trading as a form of income, you’ll have come across people talking about financial trading. But what is it exactly? And should you do it?

financial tradingWhat’s your instrument?

To put it simply, financial trading is the buying and selling of ‘financial instruments’ in order to make a profit. These can be cash instruments, like shares (ownership shares of a company) and forex (purchasing currency), or derivatives, such as CFDs, futures, and options. It’s done by everyone from individuals doing it in their free time, to governments trying to make a profit. It’s a huge industry that impacts the entire world.

If you take a cursory search on the internet, the chances are you’ll find people advertising various forms of trading as some sort of ‘get rich quick’ scheme. Whilst some people do indeed get lucky with these, financial trading is risky and complicated, and the people preying on those looking for a quick buck are simply being unscrupulous. A number of financial trading practices often get a bad reputation due to the actions of these unscrupulous brokers.

Short term outlay; Long term gains

So financial trading is not a get rich quick scheme. Rather, if given proper planning, thought, and hard work, financial trading can be an extremely rewarding pursuit. Putting aside the super success stories, an average day trader can earn a good six figure salary, and an above average one many times that.

But even if you don’t want to go into trading as a profession, there are good reasons to get into it. It can be an incredible side income, flexible enough to let you work on it when you want, where you want. You could trade 24 hours a day, five days a week if you so wished, but equally, depending on your investing style, it can be something you don’t track as much. However, with trading platforms the easy-to-use dashboards provide visibility of your investments and market performances of the asset you’ve invested in.

Whatever the general economic climate is like, you can prosper as a trader. If you get made redundant, or suffer some other happenstance which means you lose your job, then having a trading portfolio means you can continue earning. If you short the market well, recessions can actually make you money.

There are some people that financial trading isn’t suitable for. You don’t need to be a maths genius (although it certainly helps), but an analytical mind is a must. You need to be able to make educated choices and analyse trends. Equally, trading is not for the hot-headed. This might go against much of the stereotypes about financial traders, but the fact is that you need to trade with your brain, not with your gut or heart. Doing that is a very good way to lose money quickly! Finally, you need to have capital that you can afford to lose. Trading is inherently risky, and there is a chance that you lose your investment – you have to be okay with this.

Financial trading offers you the chance to use Leverage. As a definition, leverage is very famous for short-term trading among CFD Trading Brokers and CFD Traders. Leverage acts as a multiplier to your  trading capital. It magnifies the result of your trades, if you profit it multiplies your profits, if you lose, your capital may last for minutes or even seconds. It is a kind of loan (borrowed capital) and increases the power of a financial position (Long of Short).

In terms of risk, trading instruments with leverage is the highest risk a trader can afford. The higher the level of leverage, the higher the risk. Although high leverage offers you the possibility to earn money fast, in the real world the majority of traders lose money. With a little internet research you can find Online Brokers offering high leverage to their clients, but if you plan to start trading online its highly preferable to use the lowest possible levels of Leverage. Keep in mind that brokers tend to advertise leverage, just because they make money from traders’ capital losses.’

For anyone who is prepared to take the time to learn the fundamentals and do it properly, financial trading is worth doing. You might find that it isn’t for you, or you might excel at it, but the potential rewards make it worth trying.

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