Online trading has become massively popular since the advent of high-speed internet. Nowadays anyone, anywhere can trade pretty much any financial instrument in the same way that used to be the exclusive domain of investment bankers.
This means that for the online trading novice wondering how to trade online there is a huge (and often confusing) choice of products, markets, brokers and trading platforms.
We would suggest that someone new to online trading should stick with the more popular (and simple to understand) trading methods.
CFD stands for Contracts For Difference. Like spread-betting, they allow you to take advantage of rising and falling markets with buy and sell prices set by the dealer.
Profits from CFDs are liable to capital gains tax in the UK, whereas any profits from spread-betting are tax-free. This cuts both ways though as losses from CFDs can be offset against other investment gains, but losses from spread-betting cannot.
CFD traders will trade a certain number of shares or lots at a given buy or sell price (depending on whether going long or short) as opposed to the spread-better who is betting a value per point of price movement. CFDs have tighter spreads than spread-betting, but funding charges and dealer commission apply instead.
ETF stands for Exchange Traded Fund. ETFs are essentially like shares, but rather than buying a stake in an individual company, you buy a share in a fund that tracks the price of a commodity – there are a huge range of ETFs available for those wanting to trade oil, gold, silver and many others.
ETFs are bought and sold in the exactly the same way as stock market shares, with commission paid to a broker for arranging the purchase and sale.
Unlike CFDs and spread-betting, ETFs do not offer the opportunity to leverage, however this means that losses cannot exceed your initial investment. In the UK, gains arising from ETFs are taxable as capital gains, the same as CFDs.
A stock market index is a method of measuring the value of a chosen selection of the stock market. For instance, the FTSE 100 index is a rating of the top 100 companies listed on the UK stock exchange (in share-price terms).
When trading indices, you are speculating on the rise or fall of the value of any chosen index. Therefore if I’m short on the FTSE 100 I’m hoping for a decrease in the value of the companies which make up that index which will in turn lower the value of the index as a whole.
These are the share-values of individual companies listed on stock exchanges. Trading long or short on these means you are speculating in the share price of that company increasing or decreasing.
The commodity market consists of resources that are produced agriculturally or extracted (mined) such as crude oil, coal, rice, tea, wheat or (our favourite) gold.
The price of the commodity is determined by global demand, so if we are long on gold we are hoping that the global demand for gold increases therefore leading to its price increasing.
We have been successfully trading gold online for many years and so know a huge amount about the different macro-economic events affecting global demand and how, when the different events occur, they are likely to influence the price.
To trade any market successfully, you too need to become expert in it.
Managing the Risks
Deciding how much money to put in your online trading fund is a very personal choice.
You need to be comfortable with losing all of that money – never trade with funds which you need to survive!
There is a very accurate saying, “scared money don’t make money”. If you are worried about losing it, you will inevitably make the wrong decisions at some point trading online and it will wipe out your funds.
Once you have decided how much to put in your online trading fund, there are things you can do to manage the risks. Your goal is to make money trading online, not to get wiped out!
You need to make sure that you can never be cleaned out in any single trade. To do this, make sure you ALWAYS set a stop-loss. Our dealer provides guaranteed stop losses, so we can sleep easily knowing that if the trade goes against us we will be taken out when our stop-loss is it.
Your stop-loss position and the value of your stake should be such that the maximum loss on a single trade is something which you can withstand.
Platforms and Brokers
Always make sure you work with a reputable broker – as we are 100% independent, it would be wrong for us to make any recommendations here, but there are free forums on the internet where brokers and platforms are discussed at length.
Once you know your online trading method and chosen market check out forums such as Elite Trader, Trade2Win and Big Mike’s Trading Forum. Search any of these forums and they will have threads discussing all of the available brokers and platforms. If the broker or platform you are considering isn’t highly recommended (or even heard of) within these forums then give it a wide berth!
Get Independent Support
The final piece of advice is to work alongside other like-minded people so that you can get support and ask questions if you don’t understand something.
Forums are great for this, but you do need to be careful with the advice some individuals offer – you have to remember that they may be just as inexperienced as you are, but they just don’t know it!
Equally, the provider of your trading platform or your broker may offer advice – just remember that their real interest is in you making the trade with them.
Do your research and work alongside the experts for a while to see how they make money trading online.