Online trading is increasing in popularity as more people seek additional and convenient income options. To assist beginners kick off their trading journeys, Dany Mawas, Regional Director at INFINOX – a globally recognised CFD and FX trading broker which operates in Africa – explains key financial instruments that are great options for beginner traders to get started with.
Mawas says that while the market presents a vast array of earning potential, all beginner traders need to first understand the differences between FX and CFD trading, and that there are several factors to determine before deciding on their preferred trading instrument.
“FX is the abbreviated term for forex, and is the instrument for trading international currencies,” he says. “With markets reacting to daily geopolitical and economic affairs, the forex market is ideal for speculating on world events and taking advantage of trade opportunities.”
Mawas points out that the forex market is exceptionally popular with traders and is the largest market in the world with more than $5trn traded everyday. This, he says, creates a hugely liquid market and makes it easy to enter and exit at the price you want to, therefore increasing trade opportunities for all types of trader. Additionally, forex instruments also provide a significant amount of leverage, and volatility, thus making it one of the most accessible instruments to trade.
CFD or ‘Contract for Difference’ is a financial instrument used to make a profit on the price change of an asset without having to own it. As such, the trader doesn’t need to buy a particular stock or commodity to make a profit in the future. Instead, the contract between a buyer and a seller provides traders with the ability to trade on margin without owning an asset outright.
The value and movements of a contract do follow the underlying asset, but note that it is not directly pinned to the price, which is why you might see slight differences between brokers. A CFD is a broad asset class, with traders able to buy and sell CFDs in the following:
CFD Equities: These allow traders to trade the share prices of some of the world’s largest companies and most popular brands using smaller margin amounts. Furthermore, they allow traders to access global stock markets and take advantage of rising and falling share prices.
CFD Indices: Indices are one of the most popular instruments to trade, and allow traders to buy and sell the value of the entire stock market in a single trade. They’re a great asset to speculate on world events as well as diversifying an investment portfolio.
CFD Commodities: The world revolves around commodities and CFD commodity trading allows traders to speculate on the price of assets such as precious metals, energies or agriculture. As global events shape demand and supply, speculators will look to take advantage of trade opportunities or use them as a tool to manage their risk.
CFD Futures: Futures contracts are standardised contracts with a fixed quantity, price and delivery location that serve as a legal agreement to purchase an asset at a fixed price in the future. Most commonly, futures contracts are used for trading commodities such as soybean, cocoa and crude oil, amongst others. They’re another great way to get exposure to popular markets.
Factors to consider when choosing a trading instrument
Mawas says beginner traders need to consider several factors before investing in their chosen instrument, including liquidity, volatility, low transaction costs and availability of information.
“Liquidity refers to the ease in which traders can buy and sell their chosen instrument, with high levels of liquidity seen as easier to trade,” he explains. “The volatility of an instrument refers to its continuous rise and fall, with a highly volatile instrument favouring traders – owing to its higher risk and greater profit possibilities.”
Mawas adds that traders should look for an instrument that features low transaction costs as this will allow them to generate greater returns. “One must, however, be aware that their preferred broker may charge a minimal trading fee depending on the instrument chosen.”
“The best financial instrument to trade depends on several factors, and for beginners, their budgets should dictate the type of instruments they trade,” he says. “Traders should also choose a broker that not only offers them support by being easily contactable with a local presence, but also offers learning resources.”
Another viable way to learn and kickstart your trading journey is via online community apps, such as IX Social. Here, traders can share knowledge, trades and experiences with like-minded people. Users are put in the driving seat with the latest news, community trending topics, top traders of the day and the latest prices all in one place.
“Its easy-to-use functionality, coupled with an auto-copy feature allows you to automatically copy the top traders and receive the same results. This makes it the ideal platform for beginner traders to learn and grow,” concludes Mawas.