Trading and Term Literacy, Are CFD and Forex Trades Good For Small Investors?

Thomson Reuters FX Trading. Answers, Advanced. Is Trading the Way to Riches?

As an intro lets discuss whether trading stocks, futures, commodities, bonds etc. are in general a great way to become rick. The simple answer is no. Although it is true that some people have been able to make millions and even billions of dollars in the trading world, many of these individuals were professional investors who made a life-long commitment to their careers.

What are CFD’s and Forex? And How Can They Make Me Money?

A main question while reading the title here was probably: What on earth is a CFD/Forex, and second, how can they help me? Simply put, a CFD stands for a contract for difference and it allows traders to capitalized on leverage. For example, say you want to purchase a stock at $10 per share. Instead of paying that amount, a CFD will allow you to utilized a much smaller portion (around 5% of this amount), and borrow the rest from the broker. In simple terms, a CFD will allow you to trade financial instruments (stocks, bonds etc.) with the much less capital.

Forex – – short for foreign exchange, involves the trading of currencies in relation to one another. For example, if the USD is trading at $1.05 vs the EUR, that means for each Euro dollar you have, you will have slightly less of each U.S. dollar. If you think that the USD will decline in value vs the EUR, then you would borrow capital from a broker to “short sell “ the USD. Then if the USD declines in value vs the EUR (say for example a financial crisis occurs in the US, value of the dollar would decline) then you will profit on that investment.

Both Forex and CFD trading involve a high level of risk because increased leverage lends itself for increased potential loss. Think about it – if you are borrowing money from a broker for a trade, and you take a loss, then you wil have to repay that broker!

How Can I Become a “Good” Trader?

This depends how you define a “good” trader, but generally if you want to make money trading, experience is a main factor in determining your success. If you are able to start trading from a young age, the positive impact will be immense. Take a look at Ray Dalio for an example.

Otherwise, having a solid background in economics and finance will help a great deal because you will easily be able to understand the fundamentals of financial markets and their impact.

Trading vs. Investing 

Now, I have mentioned this in the past, but trading with ALL of your money will likely not make sense. Trading in financial markets carries a great deal of risk and many, many people lose their money trading over time. However, the thrill of seeing a trade profit come through can also be quite exhilarating .

I have already recommended investing your money instead, but it will not kill you to have a smaller trading account on the side, but I do not recommend holding more that 5% of your assets in a trading account, as the probability of success can be low, after all even hedge funds shut down over trading. Then again, some also make billions! Keep this in mind while trading, have fun, but don’t risk it all unless you are prepared for the worst case scenario.