If your a new student of Stock Market Trading, it’s common to not know what to trade or what is the best market to start trading.
There are some basic questions you may want to answer to yourself before you start, like which Market to trade, whether to trade Stocks, Options, Forex, Futures or CFD’s. So I thought I’d put together a basic guide to help you though these decisions, even if it is from an Aussie point of view.
Below are what I deem to be important considerations:
Stocks, CFD’s or Options
Do you want to trade Stocks (1:1 leverage) or Options/CFD‘s (high leverage).
If you are brand new to trading, your probably better off trading stocks in your local market, until you understand and are comfortable to trade leveraged derivatives.
If you live in Australia your probably best trading the local Australian Stock Market, your probably more familiar with household companies names, like the National Australia Bank, Wesfarmers and Rio Tinto.
However, if you have a reasonable trading knowledge and are wanting to trade some leveraged instruments, there are some advantages in trading in the US Market.
CFD’s can be traded from Australia in both the Australian Stock Market and the US Stock Market with the right broker, and can give you a leverage typically of 1:10.
If you are an Option Trader or want to learn how to trade options, the place to learn is in the US market, in my opinion. Options if learnt and applied correctly, can either help you leverage your winners, protect your profits (like insurance), limit your risk, or receive a smaller, more regular income (like renting out your shares). More on these strategies in later posts.
Although both markets seem the same on the surface, as both the Australian Stock Market and US Stock Market have an Options Derivatives Market, but there are some differences as I will explain below.
Option Contracts
The main benefits of trading the US Options Market is the amount of equity required to buy each option contract. This is because 1 options contract in the Australian Stock Market controls 1000 shares, compared to in the US Stock Market, 1 contract on controls 100 shares.
For Example:
If in the Australian Market – You were to buy 1 Call Option worth $5.00, it would cost you $5000 + commissions to buy.($5×1000=$5000)
But in the US Market – You can buy 1 Call Option worth $5.00, and it would cost you $500 + commissions to buy ($5×100=$500)
So as you can see from the above example you can hold the minimum position of 1 options contract for 1/10 of the amount of equity in the US market.
This means when you are learning the Option Trading ropes with an initial account equity of say $5000-$10,000, you can diversify your positions more in the US Options Market, and not carry as much position risk, which is very important when Trading with leverage.
Liquidity
Did you know that the US Stock Market is bigger than all the other Stock Markets in the world put together. Because of this shear liquidity of the US Market, this can promote tighter bid and ask spreads in both CFD’s and Options.
On top of that, having such a large liquid options market, helps you avoid having to deal with a market maker, and receive a less than favorable price when trying to get out of options position when you really need to.
Summary
It is worth making some of these considerations, which ever Stock Market you are interested in trading.
Personally I like to trade in the US Market because of the above reasons, and in this internet age, access to data and information is probably easier in the US Market than any other.
There are advantages in each market, but in the end all Stock Markets can go up, down or sideways. Once you decide on a suitable market to trade, you will soon become familiar with, if your not already.
Cade Arnel
Trend Hunter
www.globaltrendtraders.com 2009-2010
I notice in the news the other day that a Wall St. bank has a software program that detects big trades from superannuation funds milliseconds before the trades go through and buys – milliseconds before the super funds do – therefore buying slightly cheaper and forcing the price up even higher and then selling at the higher level. They supposedly make $100K per time with this method. Especially at night when prices are more volatile.
.-= Wal Heinrich´s last blog ..Think And Grow Rich Mindset Mastery =-.
I’ve heard a similar story about another company in Australia who managed to develop some software to ‘beat the market’ through slick timings.
Good article Cade. Understanding options is always a tricky one. Buying or selling calls and puts can be quite difficult to get your head around. No wonder not many ‘average’ traders get involved. Having said that if you understand them and manage the risk they can be safer than not using them at all.
.-= David Moloney´s last blog ..Small Business Outsourcing Saved Me $5,000 and My Sanity =-.
@David & @ Wal – I too have recieved info about these people claiming they have this magic trading software/robot that beats the market. I don’t know how true it is, so I’m a bit of a skeptic.
@David you right about learning how to use options to your advantage, if used properly it can really reduce your trading risk or leverage you winning ideas.
We started off our stock market journey selling call options after getting to grips with the ins and outs of it, which as mentioned is quite tricky. Unfortunately the crash of 2008 put an end to the availability of any worthwile contracts for us. One day we’d like to get back into it as it’s a good form of trading if, as you said, it’s used properly.