Trading Choices for the Newbie Trader
Choosing which market to trade could be a real headache, especially for the newbie traders, as there are limitless options to choose from. Among the many choices available, the most common ones are stock trading, futures trading, forex trading and options trading. As trading generally involves taking risks, we will examine two trading options that have contrasting risk level: stock trading and futures trading.
Your Risk Appetite
A beginner trader should consider this determining factor when choosing the suitable trading option: your risk appetite. Risk appetite is defined by Wikipedia as the level of risk that you are prepared to accept, before taking the necessary action to reduce it. On the other hand, risk aversion is your unwillingness to accept a bargain with an uncertain payoff rather than another bargain with a more certain, but possibly lower, expected payoff. In layperson’s term, it is greed and fear deciding on your behalf.
Stock Trading Risks
Stock trading risks range from very low, for example penny stocks counters that are now making a comeback, to very high for the more expensive and well-established counters. Trading low value stocks lower your risk substantially but the profitability is also not great. If you decide to trade high value stocks for better yield, the risk is marginally higher too.
Futures Trading Risks
Futures trading allows for margin trading, a feature not commonly available in stock trading. Margin trading allows you to ‘borrow’ money you don’t already have to do your trading. This gives you the opportunity to reap big gains in a short period of time. But of course, the potential for big profits exists because there is a risk for huge losses as well. Be aware that futures trading is a zero sum trading; for every winning trade there is a losing trade out there. It is no doubt that futures trading inherently involves a much higher risk than stock trading.
As you can see, there is no guarantee of earnings in trading but it is certainly not a game of luck either as there is a science to infer what the markets are implying i.e. technical analysis and fundamental outlook.
So, how do you know if you are ready to trade? The truth is, only start trading when you have money that you can afford to lose. Never use your groceries money or your children’s college fund to trade because if you lose, then you have nothing else left. And when you do have that extra money, ask yourself how much you are willing to lose. This is the question you have to answer as to manage your risk.
Wan Zuraiha Wan Zakaria is a staff writer at Oriental Pacific Futures (OPF) where she writes on investment and trading. OPF is a futures and options broker based in Kuala Lumpur, Malaysia and provides electronic trading, brokerage and clearing services to retail and institutional traders since 2007. OPF is licensed under the Securities Commissions of Malaysia and offers cash-settled derivatives instruments traded on Bursa Malaysia, as well as select major derivatives exchanges around the world.
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