As a Trader or Daytrader you need to know the differences between the different Products that can be traded with your Broker.
Everything has advantages and disadvantages in general and not every Trader is the same. My Broker offers a lot of Products that can be traded, which include Stocks, ETFs, Futures, Options, Forex and CFDs.
What are Stocks?
Stocks are Shares of a Company. With every Stock you buy, you buy a Piece of a Company, no matter if you buy 100.000 Shares or just 1.
But what does that exactly mean? Why do Companies go Public and start to sell Shares?
The main reason is to raise capital. Companies sell their Shares for the IPO Price and receive a lot of Money. The biggest Advantage is , that they never have to pay it back. If somebody or a Company is taking out a loan from a Bank, they will have to pay it back plus additional Interest. A Company which is traded public sold their Shares and they don’t have to buy them back. They’ve got the Money from the Investor. If the Stock Price falls, it is theoretically not their Problem. I say theoretically, because of course they don’t sell all their Shares. The Company, the CEO and other Insiders usually own a huge Chunk of Shares them self. A sharp drop could also hurt their Reputation etc.
If you want to daytrade Stocks in the US, you must have $25.000 in your Brokerage Account, due to Day-Trading Margin Requirements. So daytrading Stocks is not really something for the beginner.
What are ETFs
ETFs are Exchange traded Funds, which means you can buy and sell these Funds through your Broker the same way you would buy or sell Stocks.
Daytrading ETFs is very popular nowadays and there are really a lot of ETFs that can be traded. Some large ETFs are SPY (S&P 500), EEM (Emerging Markets), IWM (Russell 2000), IWF (Russell 1000), DIA (Dow Jones). There are many more. The 100 largest ETFs by Assets can be found here. Unfortunately, the same Day-Trading Margin Requirement appears here and you can only daytrade ETFS, if you have a $25.000 Account. Fortunately many Brokers offer CFD Trading and these large ETFs are available as CFDs. At my Broker Interactive Brokers, I can trade all these ETFs as CFDs.
What are Futures
Futures are as the name suggests Products that you buy or sell in the Future. If friends or Family asks me what a Future is, I tell them that they have to see it as a Voucher. You buy a Voucher and later you can redeem it. So let’s say you buy an Oil Future (CL) which expires in 1 year for $60 a Barrel (you have to buy 1000 Barrels though), you can redeem your “Voucher” in 1 year and get your 1000 Barrels of Oil, no matter what the Price in 1 year will be. Of course as a Trader you don’t want to keep your Future until Expiration, so you sell it before it expires. Most Brokers will send you a warning or sell it for you if you forget to sell your Futures.
What are Options
An option is a contract which gives the buyer the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price on a specified date, depending on the form of the option. There are Stock Options, Index Options, Future Options etc. I don’t want to go into detail too deep as there is really a lot to say about Options. But to keep it short and simple: Options lose Value over Time. If you’re a buyer of Options, you could see the Value of your Investment shrink over time due to the Time Decay. I never just buy Options, because of this fact. When I started to trade I’ve learned it the hard way, that just buying Option (and holding) is a bad Idea. It may work for some People, if they really know what they are doing. I prefer to write Options (Short Selling) to take Advantage of the Time Decay.
What is Forex
Forex stands for Foreign Exchange. So when People talk about trading Forex, they mean selling or buying a Currency for another Currency.
Most Forex Brokers offer a huge Leverage, which means that you can buy or sell 100.000 Dollars, even if you only have 2000 Dollars in your Account.
Forex Trading has become very popular, because many Brokers allow you to trade with a very small Account.
Most Popular Currency Pairs:
EUR/USD (euro/dollar) – “euro”
USD/JPY (U.S. dollar/Japanese yen) – “gopher”
GBP/USD (British pound/dollar) – “cable”
USD/CHF (U.S. dollar/Swiss franc) – “swissie”
AUD/USD (Australian dollar/U.S. dollar) – “aussie”
USD/CAD (U.S. dollar/Canadian dollar) – “loonie”
NZD/USD (New Zealand dollar/U.S. dollar) – “kiwi”
What are CFDs
CFDs stand for “Contract for Difference”. There are a lot of different CFDs that can be traded. At my Broker I can trade CFDs for Indicies, Shares, ETFs and Forex.
Trading Share CFDs or ETF CFDs is almost the same as trading Shares, but there are a few differences.
Leverage: When trading Stocks, most Brokers will give you a 4-1 Margin Ratio, which means that you can buy Shares for $8000 if you have $2000 in your Account.
CFDs can be traded with a higher Leverage, but how high depends on the CFDs and your Broker.
Pattern Day Trading Rule: In my Eyes, the biggest Advantage of trading CFDs is the fact, that there is no Daytrading Margin Requirement. So if you don’t have $25.000, but want to trade Stocks, CFDs might be the right thing for you. There is one Problem though. When you buy or sell a CFD, you buy or sell it from your Broker and not any other Market Participant. Your Broker wants to make money and you want to make money…..I would only trade CFDs with a very reputable Broker.
Extended Hours Trading: Share and ETF CFDs can not be traded during Extended Hours trading (At my Broker, I’m not sure if other Brokers allow that). This is a huge disadvantage if you plan to hold your Investment over night. Stocks and even ETFs can drop 90% in After Hours trading. It is really bad if you can not get out of such a Trade.
What to Trade
So now I’ve gave a brief insight into Stocks, CFDs, Futures, Forex, Options and ETFs, but what is actually the best Product to trade?
Well, it depends on your Account Size. In my Eyes trading Futures is the best, because Futures are volatil, they have high liquidity and the Fees are the lowest.
Plus you can trade them with high leverage. To buy one Oil Future (CL) with a Value of $60000, you only need about $1200 available Funds. Depends on your Broker though.
But if a high Leverage Trade goes against you and you don’t use Stops, it can wipe out your entire Account in a glimpse of an Eye.
Account Size = $1 – $1000: If you have $1000 or less in you Account I would recommend trading Forex. Some Brokers allow to open in Account with as little Money as $1. Oanda used to do that, but I’m not sure if it’s still possible. Starting and learning to trade with a very small Account is not a bad idea, because real money is involved (which is better than Paper Trading), but you wont lose your Shirt.
Account Size = $1000 – $2000: With $1000 – $2000 in your Account, you still can not buy on Margin which means that you can not buy Options, Stocks, Futures and ETFs, but you can buy and sell Index and Share CFDs. So trading CFDs and Forex is an Option if you trade with less than $2000.
Account Size = $2000 – $25000: If you have more than $2000 in your Account you can buy on Margin and trade basically everything including Forex, CFDs, Futures, Stocks, Options. But keep in mind that you only have 3 Daytrades available per Week. With an Account of this Size, I would trade Options, CFDs and Futures.
Account Size = Above $25000: If you have more than $25000, I wouldn’t trade CFDs anymore. Futures are cheaper and your Opponent is a real Trader and not your Broker.
You’re also able to daytrade Stocks now.