Anyone who has had any experience trading the financial markets is acutely aware of the risks inherent with market volatility. At a professional level, traders are all too familiar with the fantastic potential for the high rewards that this risk can provide.
The collapse of Lehman Brothers in 2008 is but one example that shows us just what can happen when risk is not fully appreciated, even at the highest level of finance. ‘The Big Short’, and ‘The Wolf of Wall Street’ are more popularised examples where financial institutions capitalised on market movements, making fantastic profits from trading.
Although some of these strategies were questionable to say the least, they never the less represent popular examples where profit was made from market opportunity, and that is really what the common trader should take away from these stories. In general, most assume that trading the financial markets and speculating on price moves from one commodity to the next is strictly reserved for the big banks on Wall Street, or, for the flashy London trader. In truth, market opportunity is there for all of us.
Without going into too much detail, the increasing interest in financial derivatives trading has made trading the markets fully accessible to anyone who wants to benefit from global commodity, equity, FOREX, and even government bond prices as they move each day. Just like your local supermarket opens for trading each day, the financial markets open at various different times across the world inviting market participants to commerce.
A financial derivative is simply an instrument which ‘derives’ its price from and underlying asset. So, if we take a global market like oil, the financial derivatives are there to help facilitate the trading of this commodity. Common examples are Oil Futures, Oil CFD’s, and Oil options. Our preferred derivative to trade here at The Academy of Financial trading are CFD’s, (Contracts for Difference) as they are very easy to access and allow us to speculate on price movement on a huge array of different asset classes, without ever actually owning that underlying asset.
If we want to trade the price of coffee, we are not obliged to actually buy a pound of coffee and sell it when the price rises to make a profit. In reality, we use our trading platform to trade the price of the coffee CFD which transparently reflects the price of the commodity itself.
So the next time you flick on Bloomberg and hear that the price of gold has soared 10% over the last week, the first thing that you should remember is; that this is an opportunity that we can all take advantage of. Again, risk is always a prominent factor when trading the markets and should always be appreciated, but with this appreciation, risk is our friend, not our enemy.
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