Trade in Different Markets
It’s time to take a closer look at the range of markets available to you and the mechanics of taking a position on them. For each asset type, we’ll explain the important differences between trading in CFD and trading on the underlying markets. You’ll learn about the special advantages CFD offers, as well as the risks involved.
You’ll also discover how providers price their markets, plus what determines their spreads. And by the end of the course, you should feel ready to choose a market that will suit you and the way you want to trade on.
Shares are one of the most popular and well-known financial assets available. By buying a share, you buy a small part (or ‘unit of ownership’) of a company, meaning you also receive your own percentage of the company’s profits in the form of dividends.
When you trade in CFD, you’re trading on whether the price of these shares – which reflects the value of the company as a whole – will rise or fall. As you don’t own the share itself, you will not receive any dividends directly. However, your provider will make an adjustment to your trades to replicate the effect of any dividend payments as closely as possible.
Shares are only traded during the opening hours of their designated stock exchange. Here are the opening and closing times of a few major exchanges (UK time, April – October. Opening times will be different throughout the rest of the year due to local daylight saving time changes):
2. Stock Indices
As a stock index is essentially just a benchmark number representing a group of shares, you can’t buy or sell it directly on an exchange (known as the cash market). You could of course trade each of the individual constituent stocks in their relevant weightings, but this would be a complex and inefficient process.
Most nations have one major stock index that represents the largest companies in that country. For example:
However, in the US there are several major indices, all based on slightly different sections of the market. The three main US indices are:
Dow Jones Industrial Average (DJIA)
One of the oldest and most quoted indices, the Dow Jones Industrial Average represents 30 of the most influential companies in the US. It was first calculated in 1896 and historically was made up of firms involved in heavy industry. Nowadays this association has been all but lost.
More diverse than DJIA, the S&P 500 is based on the value of 500 of the largest US shares listed on either the New York Stock Exchange (NYSE) or NASDAQ. It was first used in its current form in the 1950s and today represents around 70% of the total value the US stock market.
Established in 1985, the NASDAQ 100 is based on 100 of the largest non-financial companies listed on the NASDAQ exchange in New York City. It represents firms across a number of sectors, but in particular computing, telecommunications and biotechnology.
Each index is expressed as a figure based on the collective value of those shares. When you trade, you’re trading on this number rising or falling.
How do you trade stock indices?
Since indices are effectively just numbers, you can’t buy or sell them directly. There’s no asset to own and nothing to exchange. Therefore, to trade on the price of an index, you need to choose a product that mirrors its performance. There are several that do this:
A specialised investment fund that attempts to replicate the movements of a particular stock index. You can invest in index funds through a fund manager.
Exchange-traded fund (ETF)
A distinct type of index fund that can be traded like a stock on an exchange. Just like stocks, the price of ETFs can change throughout the trading day as they are bought and sold. Currently the largest ETF in the world is the SPDR S&P 500 which, unsurprisingly, tracks the S&P 500.
Financial products that derive their price from the performance of an underlying instrument. For example: futures, options, digital 100s, spread bets or contracts for difference (CFDs).
For CFD/Spread Betting prices, unlike shares, forex or commodities, there are no direct buy or sell prices for underlying stock indices. Each index has a unique value which is calculated on an ongoing basis. Your spread betting provider’s buy and sell prices will generally be wrapped around this value, but being based on the futures market they may not be aligned precisely with it.
For example, say the NASDAQ-100 June futures market is at 4600, and your provider is offering a two-point spread on its version of this market. This means it will add a spread of one point either side of the current value to create a price of 4599/4601.
The value of an actual stock index doesn’t change when the underlying market is closed. For example, the London Stock Exchange is open from 8:00am to 4:30pm (UK time) from Monday to Friday, and outside of these times the FTSE 100 doesn’t move as none of its constituent stocks are being traded.
However, the underlying futures market is open longer: for example, FTSE futures trade from 01:00 to 21:00. So futures prices move with fluctuations in supply and demand while the stock exchange is closed, and so do the spread betting prices derived from them.
Of course, there are still periods when both the stock and futures markets are closed (four hours in the case of the FTSE). You may be surprised to learn that some spread betting/CFD providers are nevertheless able to offer prices for their clients to deal on during these times.
To do this they use the performance of other markets around the world – generally other stock indices – to predict how that index should be priced. By applying a mathematical formula to these related markets, providers can derive a ‘buy’ and ‘sell’ price for the closed index. These prices will also fluctuate based on the business that the provider receives while the underlying market is closed, as well as any news events that could influence the index concerned.
It’s important to remember that these out-of-hours prices can be very different to those that will be available when the market next opens. So although out-of-hours dealing enables you to capitalise on opportunities while markets are closed, there’s also the risk of incurring a loss that would have been avoided if you had waited.
In addition, since there’s no market available to validate out-of-hours prices, you’ll find that most providers offer wider spreads during these periods. This gives them a better chance of reflecting the underlying index level accurately in their pricing.
Impact of leverage
When you trade on CFD stock indices, you’ll need to put up a margin payment which may only be a small proportion of the value of your position. Remember that your potential loss could be much greater than this, however.
Forex, also known as foreign exchange, FX or the currency market, is the largest financial market in the world. On average over $6 trillion worth of transactions take place every day. That’s around 100 times more than the New York Stock Exchange (NYSE) – the world’s biggest stock exchange.
As well as being traded by individuals and businesses, forex is also important for financial institutions, central banks, and governments. It facilitates international trade and investment by allowing companies that earn money in one currency to pay for goods and services in another.
Who trades forex?
There are a huge number of market participants looking to trade forex at any particular time, from individual speculators wanting to turn a quick profit, to central banks trying to control the amount of currency in circulation.
However, by far the most significant players in the forex market are the major international banks. Between them, Citigroup, Deutsche Bank, Barclays, JPMorgan and UBS account for around 50% of global forex trade.
Why do people trade forex?
Individuals and businesses participate in the forex market for two main reasons:
The vast majority of forex transactions are made simply to make money. This means the person or institution making the trade has no plans to take delivery of the currency, they are just looking to turn a profit on movements in the market.
With major financial institutions always looking to profit from small changes in forex prices, many large trades can occur throughout the day. This activity means currency rates are some of the most consistently volatile financial markets in the world – which in turn provides more opportunity for speculators to make money.
Purchasing goods or services in another currency
Every time a transaction is made between two entities in different regions, a foreign exchange transaction needs to take place to pay for the goods or services exchanged. Transactions such as this happen globally, every second of every day.
Despite the number of transactions, the amount of currency traded is often very small compared to trades made by large speculators. Therefore commercial trading tends not to have such a big effect on short-term market rates.
How do you trade forex?
Unlike share trading, forex is an over-the-counter (OTC) market. This means that currencies are exchanged directly between two parties rather than through an exchange.
The forex market is run electronically via a global network of banks – it has no central location, and trades can take place anywhere via a forex broker of your choice. This also means that you can trade forex at any time, so long as it’s during trading hours in any one of the four major forex trading centres (London, New York, Sydney and Tokyo).
Forex trading hours: April-October (UK time)
In practice, that means you can trade most forex pairs from around 21:00 or 22:00 (UK time) on Sunday to 21:00 or 22:00 (UK time) on Friday, every week. The exact times can vary due to daylight saving time changes in the UK, USA and Australia.
How does a forex trade work?
Forex prices are always quoted in pairs such as AUD/EUR, which stands for the Australian dollar versus the euro. This is because if you want to purchase Australian dollars you need to buy them with another currency, like euros.
When trading forex you are simultaneously BUYING one currency while SELLING another.
Each currency in a pair is known by a three letter currency code. In general the first two letters stand for the country/region, and the last letter represents the currency. So taking USD/JPY as an example: USD stands for the US dollar, while JPY represents the Japanese yen.
Commodities are physical assets. Unlike shares, indices or currencies they are raw materials mined, farmed or extracted from the earth. Some examples include:
To be officially tradable, a commodity must be entirely interchangeable with another commodity of the same type, no matter where it was produced, mined or farmed.
For example, to a commodity trader, gold is gold. It doesn’t matter where it was extracted. An ounce of gold mined in Australia is worth exactly the same amount as an ounce of gold mined in China, the USA or Tanzania.
The same can be said of other commodities such as natural gas, cotton and copper, so long as they meet certain minimum quality or purity standards.
Economists call this being fungible and it means large quantities of commodities can be traded relatively quickly and easily on an exchange. This is because every trader can be confident they are buying/selling equivalent assets without needing to inspect them, or find out where or how they were produced.
Oats, tin and sugar are all fungible commodities, but plastic is not. There are hundreds of different types of plastic all manufactured to different specifications.
Types of commodity
Commodities are often placed into two groups:
These are agricultural commodities, farmed rather than mined or extracted. Softs tend to be very volatile in the short term, as they’re susceptible to seasonal growing cycles, weather and spoilage which can suddenly and dramatically affect prices.
These are generally mined from the ground, or taken from other natural resources. Hard commodities are typically easier to handle and transport than softs, and are more easily integrated into the industrial process.
You may also see commodities classified according to their ecological sector:
- Energy (oil and gas)
- Metal (gold, silver, copper, lead, etc)
- Agriculture (wheat, coffee, livestock, etc)
How are they traded?
There are two main ways to trade commodities:
The spot market
The spot market is where financial assets are sold for cash and exchanged right there and then. So, if you need immediate delivery of a commodity, you’d head to the spot market.
For example, say you ran a business that built industrial pipes. You recently got an order for a large amount of copper piping, but there’s none left in the warehouse. You need the copper immediately, so your best bet is to go to the spot market and buy some.
Similarly, if you owned a mining company and had some copper you wanted to get off your hands straight away, you’d try and sell it on the spot market.
Due to the large quantities of commodities traded – and global nature of these trades – set standards are used by the spot market so traders can buy and sell commodities quickly without the need for a visual inspection.
The futures market
The futures market is a place where buyers and sellers agree to exchange a specific quantity of an asset at a fixed date in the future, at a price agreed today.
The assets in question are not physically traded on the exchange, so the participants buy and sell futures contracts instead. This enables traders to speculate on the price of commodities without having to own them at any point, because the contracts can be sold or closed before the actual delivery date.
Which is particularly useful if, for example, you want to trade on the price of cattle, but don’t want several herds of live cows delivered to your door in a few months’ time…
While futures contracts are often used by individuals and companies looking to exchange physical commodities at a later date, they are predominantly used for speculation and hedging.
It’s also worth noting that the price of futures contracts tends to be different from buying or selling an identical amount of that same commodity on the spot market. That’s because the seller needs to take into account future risks and charges, such as the cost to hold the commodity and then transport it to the buyer. Hence futures contracts are valued using forward prices, rather than spot prices.
Who trades commodity futures?
There are four main types of commodity futures trader.
These are companies/individuals that produce or extract commodities and enter into a futures contract to offset the risk of future price movements. If, for example, you are a coffee farmer and agree to sell your yield for a specific price on a specific date, you will have a guaranteed income on that date even if coffee prices plummet in the meantime.
These are traders looking solely to profit on commodity price movements. They generally have no interest in owning the physical commodity itself.
These are mid- or long-term investors who hold commodities in their portfolio to provide protection against downward movements in other securities. Commodities tend to move in an opposite direction (or at least an unconnected direction) to certain stocks and bonds.
In the event of a stock market crash, for example, investors holding commodities may not suffer as badly as those with exclusively share-based portfolios. Gold in particular is seen as a ‘safe haven’ and receives significant investment when equities are unstable.
These are firms or individuals who buy and sell commodity contracts on behalf of their clients.
What drives commodity prices?
As with all trading, the most important factor that affects commodity prices is the balance between supply and demand.
If, for example, there’s a good cotton crop which boosts the amount in circulation – the price of cotton will decrease (assuming that demand remains the same). On the other hand, if clothes manufacturers and other companies using cotton need more of the commodity, but producers don’t have the capacity to match this demand, the price will increase.
Other factors that drive commodity prices include:
Agricultural commodities are particularly dependent on the weather as it influences the harvest. A poor harvest will result in low supply, causing prices to rise.
Economic and political factors
Events such as war or political unrest can have a big effect on prices. For example, turbulence in the Middle East often causes the price of oil to fluctuate due to uncertainties on the supply side.
The US dollar
Commodities are normally priced in US dollars, so their prices generally move inversely to it. If the price of the dollar falls, it takes more dollars to buy the same amount of commodities – so the price of commodities rises. Conversely, if the dollar goes up then it’s cheaper to buy commodities, all things being equal.
Cryptocurrencies are a form of digital money that runs on a completely new monetary system, which is decentralised and peer-to-peer. Essentially, this means that cryptocurrencies eliminate trusted third parties, such as banks or governments.
For such a network to work effectively, it needs to be foolproof, with every transaction done in a transparent and verifiable manner. This network is what is basically called the blockchain, and at the centre of the blockchain technology, is the distributed ledger.
There are three key points about the cryptocurrency:
- The most important feature of a cryptocurrency is that it is not controlled by any central authority: the decentralised nature of the blockchain makes cryptocurrencies theoretically immune to the old ways of government control and interference.
- Cryptocurrencies leverage blockchain technology to gain decentralization, transparency, and immutability
- Cryptocurrencies can be sent directly between two parties via the use of private and public keys. These transfers can be done with minimal processing fees, allowing users to avoid the steep fees charged by traditional financial institutions.
By definition, a distributed ledger is a held database that can be updated independently by any participant who is part of a larger network. This is in contrast to other ledgers that only have a single authority that counter checks and updates everything.
To perform a transaction on the distributable ledger, you will need a cryptocurrency wallet. This is, basically, like a normal wallet, but now digital and encrypted.
A crypto wallet will have a public key and private key, which serves as your digital identity on the platform. Your public key is how you are identified by anyone on the trading platform, and it is what you can share with anyone who needs to send you crypto funds.
But for you to perform any transactions on the distributable ledger (like sending or accessing your funds), you will need your private key(s).
It is these public and private keys that have seen cryptocurrencies labelled as being pseudonymous. A distributable ledger is open for all participants to see, and anyone can possibly see transactions between different wallet addresses.
While your public and private keys give you a digital identity, they are not necessarily tied to your real-life identity. You are not entirely anonymous, because the distributed ledger is open source, but rather pseudonymous, because no one can easily determine your personal identity by watching the transaction flow.
With the absence of a trusted third party, distributed ledgers are based on a consensus between the transacting parties. When a consensus is reached, the public distributed ledger is updated.
But distributed ledgers were also designed to be immutable or unchangeable. To achieve this immutability, there has to be a verifying system. This is where cryptocurrency mining comes in.
On the distributed ledger, a collection of transactions is usually arranged into a ‘block’. Blocks are usually heavily encrypted, hence the word cryptocurrency, and they are turned into complex mathematical puzzles.
Whoever solves the puzzle, gets to append the block into the blockchain. The processing of solving those puzzles is what is known as mining.
Miners compete to solve the puzzles, and whoever wins, they get rewarded with new coins of the underlying blockchain network.
For example, if it is the bitcoin blockchain, a miner will get rewarded in Bitcoins. This is, by design, how new cryptocurrency coins are created.
Mining thus controls the speed at which coins are created (or the supply). By theory, with more supply, there is the threat of devaluation of the underlying coins. To prevent this, the puzzles are designed to get harder when more blocks are built.
But there is also another reason why mining is important. Mining ensures the accuracy and fidelity of transactions, which is imperative because once a transaction is added on the distributed ledger, it cannot be altered. This introduces the Proof of Work concept, which as the name suggests, is a system of validating work and proving that it is indeed correct.
Miners commit a lot of computational resources to find the answers to the mathematical puzzles. With Proof of Work cryptocurrencies, the puzzles are designed to be hard to solve, but very easy to verify or prove that it is correct. It is this Proof of Work that validates a cryptocurrency coin or gives it value.
Despite the foolproof nature of the Proof of Work system, there are some limitations. You will require hardware with huge computational power to increasingly solve harder puzzles, and this makes the process of mining expensive. This will also likely mean that only big players can be incentivised to do mining, which defeats the entire decentralisation aspect of cryptocurrencies.
So, in summary, cryptocurrencies are basically digital coins that run on a distributed ledger system. They are produced by miners who have specialized hardware designed to solve mathematical puzzles before a transaction is verified and added on the distributed ledger where it now becomes immutable. The idea of work giving value to a cryptocurrency coin is what is known as the Proof of Work system.
How can you make money with cryptocurrency?
In addition to trading on cryptocurrencies there are a number of ways to make money with these unique new assets. One related way is through investing. Buying at lower prices and holding on as the price of the cryptocurrency rises. It is also possible to do something called staking, which pays out small amounts of cryptocurrency just like interest or dividend payments. Others also use computers to mine cryptocurrency, and this is how all of the Bitcoin is created. One further way is through airdrops or forks. In an airdrop the cryptocurrency development team gives away coins. A fork creates a new cryptocurrency and the holders of the old cryptocurrency are also given an equal amount of the new cryptocurrency.
Will cryptocurrencies still be valuable in the future?
It’s an impossible question to answer, but there is every indication that cryptocurrencies will continue to have value long into the future. The increased adoption should also lead to an increase in value, while the addition of new valuable features will help to increase the adoption of cryptocurrencies. Another important related question might be which cryptocurrencies will have value in the future, but without a crystal ball or time machine there’s absolutely no way to know.
Will central banks use cryptocurrencies in the future?
There are already plans being drawn up for digital currencies at many of the world’s central banks, including China’s PBOC, the Federal Reserve in the U.S., and the ECB in Europe. But can these central bank digital currencies be considered cryptocurrencies? Some would say know since one of the underlying tenets of cryptocurrencies is decentralization. Another is as a means of exchange for those who wish to avoid the cash propped up by central banks. In that respect the answer is almost certainly a resounding no. Central Banks will almost certainly come up with digital currencies, but they won’t be considered cryptocurrencies.
If the first decade of cryptocurrency has been about adoption and regulation, then the trend of the coming decade promises to be about national cryptocurrencies.
Like other cryptos, national cryptocurrencies are based on the distributable ledger technology (blockchain), but they are issued and backed by national governments.
The only issue with national currencies is decentralisation because naturally, governments are reluctant to lose control of the monetary system.
But while national cryptocurrencies defeat one of the major appeals of the blockchain technology, they also pave the way for a more efficient monetary environment.
The Future of Cryptocurrencies
Clearly, national cryptocurrencies will be a predominant trend in the near future. But this comes with some pros and cons. In terms of currency distribution, cryptocurrency is safe and easier to distribute than traditional cash.
National cryptocurrencies will also allow for the faster settlement of payments and potentially, even much cheaper transactional costs. Still, a blockchain based digital currency carries with it some disadvantages.
To launch a national cryptocurrency would require significant investment, which may not be a justifiable use of taxpayer money. Another disadvantage would be slow payment authorisation, something that is continually being innovated upon in the crypto world; but there would not be such time freedom with a national cryptocurrency that will be used widely. The inefficient use of electricity for small payments is also another factor to consider.
Ultimately, central banks are mandated to ensure financial stability by the efficient use of their monetary policy. National cryptocurrencies only make it easier for central banks to achieve this because monetary policy will directly be transmitted to firms and households.
As the blockchain technology continues to improve, it only means that national cryptocurrencies will continue to solve the current constraints of the conventional monetary system. Also, check out our post on how cryptocurrency works in general.
Why Do People Invest in Cryptocurrencies?
Cryptocurrencies rose to stardom in 2017-2018, despite having been around for almost a decade prior to that. Even though the hype of the crypto-rush has passed, they have retained an air of aura about them.
The investing world still has fond memories of the huge returns that this exciting asset class delivered back then, and remains a firm favourite with many investors due to their volatility which presents many trading opportunities at any given moment. Crypto investors fall mainly into two main categories. The first group firmly believe in the idea of a decentralised peer-to-peer medium of exchange that will replace the current, old and stale global financial industry. For this group, an investment in cryptocurrencies is an investment in the future of a free and transparent monetary environment.
The other group can collectively be referred to as speculators, whose investment in cryptos is purely for monetary gain. Speculators, including big institutions and retail investors, have been attracted to the crypto space owing to the abnormal returns the asset class has delivered over the years. Depending on their goals and risk appetite, investors can invest directly by buying crypto coins and tokens through crypto exchanges, or indirectly by investing with brokerages offering cryptocurrency CFDs.
The Risks of Investing in Cryptocurrencies
Here are some of the risk factors when investing in cryptocurrencies:
As valuable digital assets, cryptocurrencies have been the target of sophisticated hacking attacks. Investors that hold cryptocurrencies in crypto exchanges that offer online wallets may be at risk when hackers implement successful attacks.
b. Regulatory Concerns
Governments across the world have always cast a suspicious glance towards cryptocurrencies. Regulatory clampdowns have always delivered a negative sentiment for cryptocurrencies, which consequently triggers massive price losses.
c. Fake/Scam ICOs
Initial Coin Offerings (ICOs) provide an amazing opportunity for investors to ride a crypto coin’s price rally from the ground floor. While returns can be substantial, investors can be separated from their money even before getting on board. Without due research, it can be easy to fall victim to numerous fake ICOs whose agendas are simply to scam investors.
d. Can you make money from cryptocurrency?
There have been many people that have made money with cryptocurrencies over the past decade. So, it makes sense that you can also make money with cryptocurrencies by investing wisely in them now. By taking the time to analyse changes in the cryptocurrency markets and choosing the best coins you will certainly increase the odds of success in your favour. Or you can try the long-term method of buying the best cryptocurrency and simply holding it. Those who take this approach believe that the best cryptocurrencies will continue to appreciate in value, making holding the best possible way to invest in the digital currencies.
Trade Cryptocurrency CFDs with Metfx
The above risks have always limited the potential of investing in cryptocurrencies, with the aim of prices increasing in the future. Alongside other factors, such as a lack of dividends and naturally high volatility, most investors now consider CFDs as the best way to reap maximum benefits from the price movements of cryptocurrencies. Cryptocurrency CFD trading involves speculating on the price changes of underlying coins, without actually owning them. This essentially means that investors have the unique opportunity of making a profit whether prices rise or fall. As well, when trading cryptocurrency CFDs, investors do not have to worry about some of the risk factors outlined above as they will only be speculating on the price changes (up or down) of their favourite crypto coins and tokens.
As a regulated and reputable global broker, Metfx offers cryptocurrency CFDs to all investors. Here are some of the benefits you will enjoy when trading cryptocurrency CFDs with an award-winning broker:
Boost your profit potential when trading cryptocurrency CFDs with leverage of up to 1:5. On other asset classes, such as forex, traders can enjoy leverage levels of up to 1:1000.
b. Short Selling
You do not own the underlying asset when trading cryptocurrency CFDs. This means that you can still generate profits by speculating on prices falling.
c. Low Trading Costs
With spreads as low as 0.3%, cryptocurrency trading costs at Metfx are much lower than commissions charged by crypto exchanges or other trading platforms.