What is online trading?
Online trading is the buying and selling of currencies (also known as forex), stocks, commodities and indices via CFDs (contracts for difference) through the use of an online retail broker’s trading platform.
Essentially, your goal is to buy something for one price and sell it again at a higher price, thus making a proﬁt. Alternatively you could sell something for one price and buy it back again at a lower price for a proﬁt. You buy an asset when you expect it to appreciate in value (long position) and sell when you expect it to depreciate (short position) in order to benefit. It is important to understand that you’re not physically buying or selling anything as you are trading via CFDs.
CFD’s or Contract For Difference give you the ability to trade the difference in value of a specific asset. The main feature of a CFD is that you are not physically buying or selling anything as there is no ownership of any asset involved. You don’t have to own the asset in order to trade it.
I’ll give you an example: you think that the value of the Facebook shares is about to go up, but instead of physically buying the stock, you can buy, let’s say 10,000 CFD’s, and then if you’re right, and their value indeed goes up, you can sell your CFD’s, close your trade and earn the difference- obviously it goes both ways and if you’re wrong you will lose.
The benefits of trading CFD’s versus physical shares are that you can use margin and thus enjoy great leverage; that means that instead of paying the full price of the security, you pay only a small amount of its total value. What more is that you don’t need to pay stamp duty on any trades because you don’t physically purchase them, and so transaction costs are decreased.
How do I know if something will go up or down
Diﬀerent factors, such as supply and demand, economic policies, inﬂation, and interest rates among many others, will affect an asset’s price. We will get into this more in the next few lessons when we discuss what you can trade online.