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.
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.
If in the Australian Market - You were to buy 1 Call Option worth $5.00, it would cost you $5000 + commissions to buy.($5x1000=$5000)
But in the US Market - You can buy 1 Call Option worth $5.00, and it would cost you $500 + commissions to buy ($5x100=$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.
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.
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.