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What can we trade on the stock exchange?

There are many instruments that can be traded on the stock exchange, so we will summarize them at the beginning and then discuss them in more detail.

So you can trade on the stock exchange, for example:

  • Stocks – securities of companies
  • forex – Foreign Exchange (currencies)
  • commodities (futures) – gold, silver, platinum, oil or indices
  • Cryptocurrencies
  • CFD
  • also options or ETFs – exchange-traded funds

It is very difficult for a beginner to get to grips with this jungle of trading tools, so we will try to explain it as simply as possible.

Stocks

Stocks are securities of companies that we can buy or sell. The amount of stocks we buy is the amount of shares we will have in the company. They are suitable not only for short-term traders who can profit from very small and fast movements, but also for long-term investors who want to benefit from the growth of the company and receive possible dividends.

A dividend is a payment of a share of a company’s profits that usually occurs once a quarter. But beware, not all companies pay dividends.

If you want to be a more conservative trader or investor, you can also trade stock indices that represent individual stocks. The best known stock index is the S&P 500, which represents the 500 largest companies in the US. If you purchase this stock index, you have purchased 500 shares included in the index. This is one of the reasons why stock traders actively track this index in their analyses. Just as the S&P 500 moves, so do 80% of stocks.

Stocks and stock indices can be traded but also intradenally or swing and also use levers e.g. with CFD contracts that are linked to stocs or stock indices and are very often traded by traders. CFDs allow us to use capital more efficiently as they usually only block 20% of the trade volume.

How do stocks work?

As an owner or shareholder, you have a share in the assets and earnings of the company. We can give an example of when you want to start a business and you don’t want to borrow from a bank. You need 100,000, you put 10,000 into the company yourself, and you find 9 other investors who put in the same amount as you. From this, they receive a share that represents the value of 10% of the company’s assets and future earnings. As the overall value of the company grows, so does the value of the stock.

Forex (currencies)

Forex – Foreign Exchange, is the largest market in the world where you trade currencies. Forex does not have its own exchange, but more than $5.2 billion worth of currencies are traded daily.

Forex trading hours start on Sunday evening at 23:00 and end on Friday at 22:00 and can be traded 24 hours a day, 5 days a week. You buy one currency and sell another currency in the process.

The most famous forex pair is the Euro Dollar traded under the symbol EUR/USD.

In addition, the British pound, Japanese yen, Canadian dollar, New Zealand dollar, Australian dollar and Swiss yen are also traded in large volumes.

Commodities (Futures)

Commodities are the second largest market in the world and you can trade commodities such as gold, silver, platinum, oil and indices.

They are often also called “futures trading” in English futures trading. It is a financial derivative or contract that is traded on a commodity futures exchange. This contract gives the holder the right to buy or sell at a future date, at a certain price and a certain amount of the underlying asset. The underlying asset can be e.g. a commodity such as gold, oil and others mentioned above, but it can also be a currency or a stock index etc.

Commodities or futures contracts are used by traders to speculate or hedge (hedging their current stock market positions). If the contract expires, it is either physically realized or financially settled. But most traders don’t let the contract expire and the exchange invites you to close because they don’t want to worry about delivery, e.g. physical gold. Traders either close the contract before the expiration date or roll it over to the next date.

Commodity markets are very volatile and e.g. Gold futures contracts are very expensive. Before you trade these contracts, it is important to understand their risks.

Cryptocurrencies

Cryptocurrency is a digital or virtual crypto currency that uses cryptography for security and is therefore very difficult to counterfeit.

It is not issued by any central authority, so it is theoretically immune to government interference or manipulation.

The downside is that the anonymous nature of crypto transactions makes cryptocurrencies suitable for a range of criminal activities such as money laundering and tax evasion.

The first cryptocurrency introduced was Bitcoin, which was launched in 2009 by a person or group known as Satoshi Nakamoto.

As of September 2015, more than 14.6 million bits were in circulation with a total market value of $3.4 billion.

Bitcoin’s success has spawned a number of competing cryptocurrencies such as Ethereum, Litecoin, Namecoin and PPCoin, among many others.

CFD

A CFD is a contract between a seller and a buyer that involves the payment of the difference between the current value of an asset and the value of that asset at the time the contract is entered into. This contract thus simply allows you to make a profit or loss not only on a rise in price, as in the physical ownership of an asset, but also on a fall in the price of the asset.

It is a type of financial derivative that is suitable for trading virtually any asset (stock, commodity, currency/currency pair, cryptocurrency, fund, index…) without physically owning the asset.

CFDs simply allow us to go long – to speculate on the rise or to short – to speculate on the fall in price and use capital more efficiently thanks to leverage.

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