I’ve already mentioned that there are many different stock markets, with some countries such as the US having several. If you think you would find it limiting to trade only on the UK markets, then there are alternatives which should satisfy your needs.
Spread Betting/CFDs
One of the most obvious things to do is to open a spread betting or contracts for difference (CFD) account. Most providers offer trading on a wide range of different underlying financial products, including shares in many of the world’s markets, indices of the markets, Forex (currency) markets, bonds, ETFs, commodities, options, and just about any other financial instrument that you can think of to be an underlying value. The advantage of a spread betting account is that you have access with one account to all these markets, there are few limitations on the size of your stake, such as you would have if you trade on the full Forex or futures markets, and (in the UK at least) there are tax advantages trading on the values rather than owning.
Note that just as shorting a stock is not a long-term “investment” option, neither are spread betting or contracts for difference. If you are looking for long-term capital growth with an investment, then you need to put your money somewhere where there is no significant ongoing cost and no requirement to comply with expiration dates. However if you are interested in short term trading, you may find that these forms of trading are more suitable for you than dealing directly in the markets.
Futures
Looking at the other types of markets that are available, you may have heard of the “futures” market, sometimes also associated with the commodities market. This is the famous market where you can win or lose a fortune, trading on the future value of 40,000 lbs of pork bellies (bacon), 10 tons of cocoa, or 1000 barrels of Brent Crude Oil. It is a playground for rich traders and corporate interests. The commodities markets as such also include current “spot” prices, and these would be traded in a similar way to stocks, wagering on the price going up or down. But the futures market is where there is excitement, simply because you are staking your money on an uncertain future weeks or months away.
It started innocently enough many years ago, when for instance farmers were concerned about which crops to plant, and how much they would be worth when ripe. Similarly, food processors, such as cereal manufacturers, saw that they would have a more certain future if they could budget for the cost of raw supplies. This led to there being contracts between suppliers and users, where they both agreed to a fair price for future delivery, giving the following advantages to both sides.
The farmers knew that they could sell their crop, and the price that they had to work with, so they could plant it in the knowledge that they should make a sufficient profit to cover their expected expenses. For their part, the cereal producers knew that they had a future supply to meet their needs, and that they too could make a reasonable profit. Obviously it could get a little more complex than this. The futures contract meant that the farmer had promised to supply the goods, so if his crop failed he would have a problem – but insurance is one of the ways that situation could be managed.
Some of the contracts were known as “forward” contracts, and these typically are custom designed for particular dates and quantities. The main market developed from these is the futures market, and this is traded through an exchange for standardized quantities, dates, and quality of goods. The exchange ensures that all contracts are fairly and fully implemented as specified, avoiding lots of individual disputes between different people.
This system works well for the companies and farmers who are dealing with the real goods. However, it is also an opportunity for speculators to make large profits. You see, the goods would only have to be supplied and full payment made on the date in the future that was set. To enter into a contract was much less expensive, and opened the possibility of large profits with fluctuating prices, depending on the actual market prices when the goods are needed. So if you thought you could predict, for example, whether there was going to be a good or bad crop, resulting in an oversupply or a shortage of something, then you might be tempted to trade futures.
The traditional futures market is something for heavyweight investors, and can be very risky for an outsider to enter. However, for a lower risk controlled trade, you can use spread betting to gamble on the rise or fall of the futures market prices.
Options
Options are another derivative, but with their own unique twist. Rather than simply betting or backing the price to go up or down, and accepting the loss or gain, options allow you to literally buy a position where you can make the trade if it is profitable, or disregard it if it doesn’t work out. Your loss is the cost of the option if it doesn’t work out, but that is all you lose.
On the other hand, your gain can be as much as the stock increases (or decreases, yes you can buy options for a loss in price). Once again, this topic has been extensively written about, and you can buy books and take courses if you are interested. You can get incredibly detailed with options, and they have their own particular form of analysis characterized by “the Greeks”, a set of numbers that define the way the option price changes.
Just a couple of notes about options. Some people regard them as difficult or dangerous. Because there are many ways to apply options, and even use them in conjunction with conventional stock trading, you should not dismiss them because of their reputation. There are safe ways of trading options, and there are risky ways, and you need to study the application of them to work out if any of the many different strategies works for you.
Secondly, although it is common to think of options as something that you buy, you can also take the position of selling or “writing” an option. This gives you an income which comes along with an obligation to fulfil the option if you need to – if you are an option writer, then you have to go through with it if needed, you don’t have the right to disregard it. While this can be risky, there are several strategies that allow you to mitigate any risk.
You will find options prices listed on spread betting sites, and can place bets on them. Unless you are prepared to study a little about how they operate, I wouldn’t advise that you rush into this.
Forex
If you’ve been interested in trading, you may well be familiar with the Forex market and even have tried it. It is the market where trading takes place on the relative value of different currencies. Unlike many other financial markets, a lot of Forex trading takes place on a very small variety of trades. Usually it is figured that most trading takes place on just six currency pairs, the most popular ones.
Forex trading is always on currency pairs, that is one currency compared to another. For instance, perhaps £1 will buy you $1.53 at current rates. If you’re trading between the pound sterling and the US dollar, then you will be trading the “GBP/USD” currency pair. You can trade either side of the equation, in other words you can choose whether you think that the pound sterling or the US dollar is going to rise in relation to the other. In the above example, the GBP/USD would be quoted as 1.5300, as by convention most numbers are taken to 4 decimal places. The last number in this case is the “pip”, which is a word you may have heard of in connection with Forex, and stands for percent in point (percent of percent).
In a traditional Forex market, you would trade a “lot” of 100,000, in this case £100,000. You don’t actually need this much money, as it is a leveraged financial product, and you can usually trade this with about £1000 in your account for starters. But as the price changes, you will likely find that you need more money. If you trade on the Forex market using spread betting you are not required to follow these rules, and can bet as much or as little as you reasonably want to.
Exchange Traded Funds
In recent years, exchange traded funds (ETF’s) have become very popular. This is exactly as described, a fund that is traded on the exchange, so you can get regularly updated price quotes. The range of things that you can buy an ETF for has been expanding regularly. It used to be that ETF’s were just available for stock indices, giving you an easy way to trade on the value of the market as a whole, or on a particular index. But lots of different funds have been invented, including those that reflect property prices, some that provide double the change in the index price, and even some that are designed to short the market, gaining in value as the market price falls.
Just to confuse matters further, you can buy ETF’s on commodity prices and even currency values. Once again, a good idea has been expanded to every possible angle, providing choices and opportunities for profit and loss. That’s probably why many people decide to stick with the simplicity of a spread betting account, and simply make trades from one software platform.