You do not need to be a seasoned economist to know that many savings accounts are providing lousy returns at the moment. You only need to keep an eye on the rate of inflation (currently about three percent) to know that large numbers of accounts fail to pay an interest rate that tops this and if you’re not getting interest above the rate of inflation your not making any money. In reality, your money is losing value if it stagnates in a poor-performing bank account.
For many people, these low and sluggish interest rates have finally provided the impetus for many people to turn to and consider trading as an alternative to get a healthy return on their money. Trading produces an excellent return for many investors, but It can also be risky if you do not know what you are doing.
So before you dive in and start investing money into the markets, its time to get to grips with the fundamentals of financial trading. To help you in that journey of financial discovery, here are four things you need to know before you start trading.
Types of trading
There’s more than one way to invest your money and, before you part with any of your hard-earned cash, you need to think about the type of investment that you would be confident in the making. In essence, there are four main asset classes to look out for including shares, cash (meaning the money you put into a savings account), property and securities (meaning bonds).
Beyond these four primary types of trading, there are four others including Forex (the trading of foreign currency), commodities (involving the likes of oil and gold), contracts for difference (trading based on the rise and fall in share prices) and collectables (trading in items such works of art).
The last four types of trading typically present a more significant return than the four traditional assets classes but also tend to be far riskier. Usually when it comes to investments and trading the higher the risk, the higher the return is typical in investing with few exceptions.
When it comes to choosing different types of markets and investments to trade on, it depends on where your interest lies, also remember that many investors trade across different markets and investments looking to build a diverse portfolio to mitigate the risk of losing money on one particular type of trade.
There are different ways to trade
Your trades can be direct – in which you buy an asset or investment – or indirect, in which you pay into a fund which manages these choices for you.
However, it is not the 80’s anymore, and you do not have to trade through a traditional brokerage when making investments, although in many cases this is still a good option if you do not mind the fees. You now also have the option though to use trade online using a platform to make trades, your software hooked into the market, and even your bank will typically offer you some types of investment accounts.
So how do you choose a way to trade? Well, it comes down to your needs, if you are a long-term investor buying shares, then an online platform or low investment account at your bank might make more sense. However, if you are looking for speed and to actively trade the markets, you will probably want to look into investing on a day trading platform or similar financial trading platform (the latter will likely cost you more but give you greater access to the market and also punch in a much faster trade).
Managing risk is critical to trading successfully
There isn’t an investment that doesn’t carry some form of risk – it is all about weighing this up and having a clear plan. Think about how much money you are prepared to tie up in investments, a worst case scenario for each trade you make and whether or not you have a backup plan to cover yourself.
This also means not over-reacting to one piece of bad news. Markets such as forex can be fast paced – with swings up and down – and it is important not to panic. Trading successful is all about having a cool head and managing risk; it is not about quick wins it is about consistent performance, and gains while mitigating the risk of any potential loss at any particular time.
You need to understand the language of the financial markets
To start, you need to get a good understanding of the language used when it comes to the markets, investments and trading. Don’t get caught when it comes to terminology; it can leave you in an uninformed or misunderstood situation when it comes to trading which is not where you want to be
When you start out, you might be left scratching your head, but you can quickly get up to speed, especially with a plethora of freely available online resources to help. Whether you need a CFD definition to help you to understand how this works or need to understand Forex price movements you are only ever a few clicks away from finding the answers you need to trade with greater confidence and clarity.
Practice trading before you invest
Think you know enough to get started? You do not! However, you do probably know enough to begin practising. Many trading platforms offer you the chance to set up and run a demo account that allows you invest imaginary funds into the market and see how you fair.
Subscribe for entrepreneurial & small business advice
Subscribe to our newsletter for advice and insights on starting, managing and growing a small business in the UK.
This allows you to put your knowledge to the test and build up your skills and investment understanding without having to put money on the line straight away. It is an excellent way for beginners to build their confidence and fine tune their trading technique. Remember when it comes to investing and trading, keep a cool head, have a plan, mitigate your risk and learn as much as you can.