Anyone who will download applications that allow for stock trading via smart phones can become a professional stock trader. Unfortunately, investors underestimate high risks and the only thing they have in mind is profit.
Stock indices used to be long-term investments but now, they may become a tool for short-term speculations thanks to trading platform users. None of us used to have similar opportunities in the past and therefore, information had to be collected in libraries and professional journals. The most persistent people could ask financial institutions for a printout report for a fee but they had to wait for it up to several days.
The Internet era
Times have changed. One can browse the Internet and start reading a report by any financial institution immediately upon its publication. Investors thus receive necessary information within minutes, including reviews and experience of other users.
The offering of investment products and tools also keeps up with the times. Stock indices have been on the rise now with hundreds of billions of dollars being invested in them.
The most important indices include Dow Jones Industrial Average measuring performance of 30 major US firms; S&P 500 measuring development of selected 500 US stocks; NASDAQ measuring a wide range of various stocks, predominantly from technical fields; and DAX 30 measuring 30 major German companies traded in Frankfurt.
If you want higher gains use the CFD (contract for difference) investment tool working on the leverage principle. You complete your funds with external capital and your gains, as well as losses though, will be higher. The financial leverage ratio is regulated by the European Securities and Market Authority. For retail traders, ESMA stipulates the maximum financial leverage for major indices, including those mentioned above, to be 1:20. For minor stock indices and individual stocks the ratios are 1:10 and 1:5, respectively. It thus may be assumed that the regulator considers trading in major stock indices to be the least risky of the above-mentioned alternatives as it permits applying the highest leverage ratio.
To better understand how financial leverage works within CFD, refer to the following model stock index:
We will work with movements of the NASDAQ index. Its value was 10,672 on 20 July 2020 at 3.30 pm. On the same day at 7.30 pm it amounted to 10,884.40. The index was thus up 1.99%. In the table, the leverage ratio ranges between 1:1 and 1:20. In this case, we will speculate on growth. When the index falls, we will incur loss. When it rises, we will generate profit.
*Fees: The table shows ‘spread’, a brokerage fee calculated from the trader’s profit as a difference between the buy and the sell price. For fees and details of the calculation, refer to the BCM documents.
Let us assume that a trader opened the position at 3.30 pm and closed at 7.30 pm. The index grew by 1.99% in this period. Speculation on growth thus paid off. If the leverage increases, the profit grows accordingly. While without using leverage the trader’s gain would only be USD 199 at an investment of USD 10,000, with leverage of 1:10 the gain amounts to USD 1,990. If the maximum permitted leverage for stock indices is used, the gain amounts as high as USD 3,980, which is 39.8% per day. The question is whether this gain may outweigh the risk, which is also high. In the opposite case, a loss incurred with the financial leverage of 1:20 in this model situation would also amount to USD 3,980.
Experience and discipline
If you know that your experience in trading is not sufficient and discipline is not one of your strengths forget about trading with CFD indices. On the contrary, those who like taking a risk and have enough experience should use the opportunity. CFD allow for high gains while using relatively small amount of your capital. However, the high profit opportunity is entailed by a threat of high losses. For this reason, you should use the tool with deliberation.
Complete the investment questionnaire that is intended to help you and protect both contracting parties against entering an inappropriate trade. Any trader is obliged to complete the investment questionnaire with a potential client pursuant to the Capital Market Undertakings Act. The investment questionnaire evaluates experience and risk appetite.Go back