As a new trader, I enjoyed learning all the different products and strategies that were being introduced to me. They were all so appealing and unique in their own way. Stock, Options, Forex, and Futures markets are products that are available to trade and as a newbie one of the questions we all have once the trading account is set up and funded is “What market do I trade?” Well, in order to answer that we kinda need to find out what each market has to offer so lets.
Stock Market: People who don’t even trade are able to explain what the stock market is. Simple explanation being you buy shares of a company at a certain price and you make a profit if it goes up and you lose money if it goes down. In this case, you are a buyer and in order to take profit or cut your losses, you have to sell the shares to close the transaction. What I came to learn is that in addition to being able to buy shares you also have the ability to sell shares you do not own. Meaning that if you are a seller of stock, you will make a profit if the stock price goes down and you will take a loss if the stock price goes up. So, if you sell XYZ stock at $100 it drops to $90, in order to take profits you’d buy to close the transaction. Trading stocks in a margin account gives you leverage which increases your buying power. For example, if you buy 100 shares of stock XYZ at $100 with a margin account you’d only have to put up $5,000 as opposed to $10,000. In addition, some companies pay out dividends, which you can reinvest to buy more shares and with proper education, adding strategies like the cover call and protective puts to increase cash flow and insure your portfolio.
Options Market: I LOVE the options market! For a new trader like me who didn’t have the necessary funds to buy 100 shares of AMZN, GOOGL or NFLX, which at the time was trading at $700 before their split, the options market gave me the opportunity to trade high volume and high volatility stocks without ever having to own them. Just like in the stock market, you can be a seller or buyer of options. You have the right to buy or sell shares at a set price known as the strike price and for a period of time called the expiration date. The capital needed to buy options vs stocks is less which is a reason why beginners like options. You can buy or sell contracts as singles or you can combine them to create spreads. My favorite options trade was an advanced strategy called the Iron Condor. It’s a combination of selling and buying a call option (bear call spread) and selling and buying a put option (bull put spread) on a stock you think is neutral and will remain neutral for a specific period of time. It’s a cash flow strategy which means when I enter the trade I receive credit and I can either let the contract expire and keep the entire credit received or I can buy it back for a profit or limited loss. The probability of the contract expiring worthless will depend on the delta which determines which strike price you buy and sell but thank goodness for coaches and mentors who have done the research and therefore save me the time of having to determine that myself. A new trader needs to learn how to trade options and a stock trader should know how to trade options for leverage and cash flow.
Futures and Forex Market: All markets are globally connected period! Most recent in memory was when China devalued their currency and the US markets took a turn to the downside. Brexit and the recent US elections too. Unlike the options and the stock market, futures and forex markets are essentially a 24-hour market which gives a trader an alternative to hedge and take advantage of news based or economic trades that stock and options investors don’t have. A futures markets are where you can trade futures contract to buy commodities like gold, oil, or an index at a specified price with delivery set a specified time in the future. Forex market is the largest market in the world. Over 5 trillion dollars are traded every day. Yup Trillions with a “T”. It’s simply pairing one currency with another and determine the value. Most of us have traded currency and didn’t even know it. If you travel to another country at some point, you will visit the currency exchange kiosk at the airport or bank and exchange your currency for that of the country you are visiting. One pair will have more value over the other, which determines purchasing power (how much that currency can get you). You don’t have to be a trader of the of the futures and forex but you do need to make it a part of your routine to know what’s happening in other markets and be aware of how that could impact the US markets and take advantage.
When you are a new trader, it can be quite overwhelming trying to determine which market(s) to trade. To most, stocks are the easiest to grasp and understand and run with right off the gate. However, for a trader with limited starting capital the options or forex market might be a better option for them because it requires the least capital to get started because of the leverage so they might focus on learning one or both. If I want to own 100 shares of Amazon, which is currently trading at about $1000 a share, I’d need $100,000 but in the options market, one contract which controls 100 shares would cost $3100. A 2:1 leverage in options sounds great now imagine a 50:1 in the forex market! As appealing as that might be, my approach was to focus my attention on learning one market at a time while staying updated in markets I wasn’t trading with the intention of one-day trading learning how to trade them all.