What Is Online Trading? The Basics For Starters

By James Robert- Nov 29, 2022 24

If you have read this article, you have probably heard about online trading and want to know more. But what does it really mean? 

Simply put, trading involves investing in a financial market. In modern times, such activities are considered quite necessary, which in fact represents a huge earning opportunity. For those who have decided to start, these are much easier than a few years ago. 

Saving alone is often not enough to meet our every need, which is why many people choose to trade. If done well, we will have everything to gain, if done badly we will have everything to lose. Fortunately for us, there are several investment options available to choose from based on your needs and best interests. 

If the subject intrigues you but you still do not understand what it is, then you have come to the right place! The following paragraphs will explain the meaning of trading, how to do it, where to do it, and all you need to know about its risks and benefits.

 

What is trading?

Online trading is the transaction of financial instruments through the Internet, conducted with the help of trading platforms provided by online brokers. So it is a remote investment method of financial products, which follows the actual buying and selling process in the market.

 

Through online trading, you have the power to sell or buy a variety of assets, including stocks, currencies, cryptocurrencies, commodities, investment funds, stock indices, and more.

 

For example, if you think that the price of a certain stock will increase over time, you can choose to buy it and then take an "on" position on that stock. Conversely, if you think it will go down then you need to open a small position.

 

The difference between the purchase price and the selling price matches the profit of the investors in this sector. If we decide to buy a stock for 80 dollars, and then we can sell it for 100 dollars, we have made a profit of 20 dollars.

 

But the trader's skill is to be able to "read" the market, to be able to "guess" what the winning moves will be.

 

Typically, on an online trading platform, a trader is guaranteed a potential return of 70% to 85% of the invested capital. Although it is not always!

 

In general, these types of activities are defined as high-risk, so it's best to think carefully and evaluate carefully before taking your savings. Let's see how.

 

The golden rules for safe trading

To move forward in this financial sector, it is very important to understand and apply some small and simple rules, which will never help us to get into bad trouble.

 

First, you will need to define:

 

       You want to lose the budget. Because everyone, especially beginners (but those who have experience) can get into trouble. So invest only the money you are willing to “burn”.

       You need to know the market you want to invest in.

       Your risk appetite, that is, whether you prefer a very profitable investment, but risky, or vice versa.

       The time you want to take to reach your financial goals. This is important to understand because it helps us understand which way we want to go. Not surprisingly, there are some financial activities that allow you to achieve short-term goals and other long-term goals.

 

Once these two things are fixed, you can choose the most suitable investment option.

 

Is it difficult to start trading online?

In today's fast-paced world, technological advances have made the entire investment and investment management process much easier and hassle-free. Anyone with a PC, smartphone, or tablet can see the changes in the financial market in its entirety.

 

It is not only possible but essential to keep abreast of all the changes in the stock market because investing in stocks requires constant monitoring. Everything should be just a tap away!

 

The most well-known online brokers now offer a wide range of financial instruments to choose from according to your needs and allow you to always be aware of every small change in the stock market.

 

What are the assets to invest in the short term?

The ideal financial instruments for short-term investing, i.e. for periods between 12 and 18 months, are:

 

       Treasury Bills (BOT);

       Treasury Credit Certificate (CCT) whose lifespan is not more than 12/18 months;

       Perennial Treasury Bills (BTPs) with 12/18 months left and high rated government bonds (such as "credibility").

 

The essential feature is definitely the duration. A short-term investment has a maturity that is not more than two years from the date of purchase of the product. So the duration of the investor's commitment is quite limited, such as profit. Low risk means always low profit.

 

What are the assets to invest in the medium / long term?

A medium-term investment when maturity 2 to a maximum of 3 years). Although long term when the term is more than 5 years or in any case, it is a financial product that should not be withdrawn before 5 years.

 

In general, we can say that stocks and all other equity-related financial instruments are the most profitable investments in the long run. An example is a fixed-income ETF.

 

An ETF (Exchange-Traded Fund) is a specialized passive managed investment fund (or slave). Like all funds, buying an ETF is like buying a basket of stocks. Investing in a fund is like combining your savings with other investors. The fund manager will then buy the materials invested with this money. The effectiveness of the investment will be determined by the results of all the individual instruments in which the funds have been invested.

 

What are the financial instruments?

Financial instruments are listed in paragraph 1, paragraph 2 of the Unified Finance Act. The most important are:

 

      Action;

      Bonds, government securities, and other debt securities are subject to negotiation in the capital market;

      Shares of mutual funds;

 

Note that payment methods are not considered financial instruments.

 

Added to this is the contract, another very interesting form of investment that we will explore further. At this point we say that we can tell the difference:

 

      Futures of financial instruments, interest rates, currencies, commodities, and related indicators;

      Interest rates, currencies, commodities, and equity indicators (equity swaps);

      Forward agreements attached to financial instruments, interest rates, currencies, commodities, and related indicators;

      Options to buy or sell goods indicated in the previous letters and related indicators, as well as alternative contracts for currency, interest rates, commodities, and related indicators.

 

How do financial contracts work?

A financial agreement is an agreement between two or more parties that conducts an exchange of amounts (sum of money) on a predetermined date. These are divided into:

 

      Forward agreement. This happens when a person called a buyer enters into an agreement to purchase a certain financial asset from another person known as a seller, which we call an implicit (e.g. a share), a price, and a date established in the agreement. The main types are futures and forwards, the former are contracts regulated by official EU rules so they are standard, not the latter.

      Swap. In this case, the parties agree on a periodic cash flow, i.e. on a pre-established date. Payments can be expressed in the same currency or in different currencies and their amount is determined by an underlying.

      Options. The buyer of an option reserves the right to buy or sell an underlying quantity at a predetermined date and price but is not an obligation. This process is very effective in protecting the market from sudden changes. If the underlying value decreases during maturity, we will use the buy option. If the price goes up. It's called call when we buy options, it's called put when we sell.

 

All of these derivative agreements are listed, that is, they depend on the performance of an underlying financial asset. Anyone who trades online knows very well that investing in derivatives is very useful to increase your profits.

 

These are high-risk investments, so are not recommended for beginners. Because they involve a strong use of so-called financial leverage (or leverage). This process allows investors to buy or sell financial assets by estimating the difference in price between the terms of the contract and the expiration date. However, those who are unable to accurately predict future market growth are at risk of huge losses.