Managing your risk: central to trading success
Trading on international markets seems complicated at first but with the right tools and a sensible approach to risk management, it can be a great way to diversify your portfolio*
Spread betting and CFDs are alternatives to traditional trading. They enable you to take a position on whether an asset is headed up or down in price, instead of buying the asset itself. Photograph: Getty Images
You don’t need to be sitting on Wall Street surrounded by banks of computer screens to trade the financial markets.
IG, a leading online trading and investments provider, helps more than 185,000 people around the world to discover and take advantage of opportunities in the financial markets. Its easy-to-use platforms and apps provide instant access to thousands of live prices, and the tools to make a decision and trade – whether on the move or at a desk.
‘The majority of our clients lead busy lives; they’re not sitting watching screens all day,’ says David Lynch of IG in Ireland. ‘There are plenty of tools to catch opportunity on your behalf. Stops and limits can automatically open or close positions at a level you specify, to cap your losses or lock in profits. And trading alerts can notify you the moment a market hits a certain price or moves significantly.’
Financial trading: so what’s it all about?
Financial trading involves buying and selling financial instruments, in the hope of making a profit.
These can be cash instruments like shares, foreign exchange and bonds, or derivatives such as spread bets or contracts for difference (CFDs). A ‘derivative’ is a product that enables you to speculate on the price movement of an asset, instead of owning the asset itself.
For spread betting, this means placing a bet on whether you think a market’s price is headed up or down. The more the market moves in your favour, the more you earn; the more it moves against you, the more you lose. CFDs work in a similar fashion, but instead of placing a bet you’re trading contracts to exchange the difference in a market’s price between when the contract opens and when it closes.
While you can use the IG platform for traditional share dealing, it’s spread betting and CFD trading that attracts most of IG’s client base.
Leverage: small outlay, big outcome
One reason for this is that spread betting and CFDs are ‘leveraged’, giving you full exposure to a financial market while only putting up a relatively small amount of capital compared to, say, buying shares.
However, even though you only put up a deposit (or ‘margin’) to open a leveraged trade, your potential profits or losses are still based on its full value. This means that you can make or lose much more than the amount you’ve invested.
When you trade, you see three prices – the market price, the buy price (which will be higher than the market price), and the sell price (which will be lower). If you think a market’s price will increase, you trade at the buy price. You can also take advantage of falling markets by trading at the sell price, or ‘short selling’, something not possible when you own an asset outright.
Leveraged vs. unleveraged trading
Say the share price of Company ABC is €4.75. You think it’s going to increase, and you want to take advantage of that price movement.
If you bought 1,000 shares in the traditional way, it would cost you €4,750 (1,000 x €4.75).
However, if you placed a spread bet or CFD trade on the equivalent of €4,750 worth of shares, you might only be required to pay a 5 per cent margin to open the trade: €237.50 (€4,750 x 5 per cent).
Say the share price then rose to €5.00: your profit would be €250 in both cases. With your leveraged trade, however, you’ve only had to put down €237.50 instead of the full €4,750.
On the other hand, if the share price had dropped to €4.50 you’d be down €250 in both cases. The difference being that with your leveraged trade you now need to put up this value, as you didn’t when you opened the trade.
Spread betting and CFD providers will often charge fees for services like holding a position overnight, live data feeds and so on – since these vary by provider, we’ve not included any here.
Managing your risk
IG offers a range of ways to take control of the risks that leveraged products pose, and stop you losing more than you’re prepared to. One of the main defences you have is the stop-loss – a free instruction to IG to close your trade at a particular level, if the market moves against you.
There can be times when the market moves too quickly to process your stop-loss at the level you requested, resulting in what’s called ‘slippage’. To protect against this, you can place a guaranteed stop. You’ll pay a small premium if this type of stop is triggered, but you can rest easy knowing that you have total control over how much you’re risking.
Of course, knowing where to place your stop is crucial to successful trading. To find out three popular methods for deciding where to place your stop, watch the video above or take a look at this article from IG analyst Joshua Mahony.
You’ll find plenty of other tools in the IG platform to help you protect against risk. By staying informed of market movement, you can ensure you’re not caught unawares. Live integrated feeds from Reuters and Twitter provide up-the-minute news, and you can set alerts to trigger ahead of an important event.
Become a better trader
If you’re looking to learn more about trading or sharpen your skills, it’s worth making use of the free resources on IG Academy, IG’s online learning hub.
Here you can access expert-led seminars and webinars, as well as a whole suite of interactive courses, on your desktop or mobile.
What’s more, you don’t even need to be an IG client to gain access – you just need to open a free demo account, which has the added benefit of allowing you to practise trading risk-free with virtual cash.
‘As with all forms of savings and investments, there is a risk element to trading,’ says Lynch. ‘But a big part of what we do is help clients understand how to manage that risk, and how to use the tools we offer to do help them do just that.’
Find out more at IG.com
*All trading involves risk. Losses can exceed deposits.