Financial trading–what’s that?
‘Who’s this guy?’ – you may ask yourself (video below). Financial trader? That’s somebody who trades in stocks and shares – right?
The short answer is ‘no’. Whilst the term may include ‘stocks and shares’ it doesn’t exclusively. It’s like asking, “Do cars (automobiles) have four wheels?” The answer may seem simple – but some cars don’t have four wheels. So to say ‘yes’ means that a single exception proves the answer to be wrong. In fact there are many cars with three wheels. Many things that have four wheels are not cars. It’s that sort of ‘yes’ and ‘no’ answer at the same time.
Is this article about investing – and what exactly are investments?
I don’t think so, but some people will not agree. In general people think about investing as putting money into something and expecting a gain at the end of some period. Well, I hardly think putting money into a bank account at a standard rate of interest will be seen as investing. The percentage gain is usually low and often will not beat interests rates. So putting money into a bank account and expecting a 5% gain is not seen by me as ‘investing’.
But there is another quality to ‘investments’. People purchase tangible assets at a certain price then sell them on, expecting a reasonable profit. That profit may be a small or a large one. Tangible assets could include houses, cars, rare coins, or shares etc.
What if people put money into assets that are not tangible?That could still be an investment. An example would be Bitcoin. You can’t hold it in the hand. By contrast, you could hold a certificate of ownership for shares. Bitcoin and shares can be sold on open markets.
What if the the thing one puts money into is not tangible and not saleable on an open market? Would that be an investment? That’s were I think the line should be drawn. And this is where we enter the domain of ‘derivatives’.
Financial trading could include managing hedge funds, stock market trading, trading in foreign currencies or commodities, and financial spread-betting (and this is not an exhaustive list). Who are these people – and what do they do? Well, a lot of them are actually responsible for the size of your pensions (if you have invested in one – dare I say).
For this article, I’m focusing on spread-betting. Betting? Is that gambling? Yep – just like when you buy a ticket in a raffle or the national lottery, or when you go to the casinos. Yes – I know that you who reads this may not go to casinos to bet your money to make a profit. You go there to lose your money and to have a fun time doing so – right? That’s what I’m told by a fair few people. I can’t argue with them – it’s their thing.
Why is spread-betting gambling?
Because the HMRC (of the UK) says so. In fact European law says so. All that information is in the public domain. Spread-betting is not treated as gambling in all countries – and I’m not about to give lists etc. But because spreadbetting is treated as gambling, in specific conditions where it isn’t your main earning, then profits are tax-free in the UK (at this time). So how does spread-betting work? See video below (or not).
The ‘spread’ is basically the difference between the selling price and the buying price of an item at the time of engagement (it could be gold, milk, orange juice concentrate, currencies or shares). At the outset you get to see the buy-price and the sell-price. It’s like buying foreign exchange at a counter at the bank or at an airport etc. If you make a buy bet (which is called ‘going long’) at say 10:00PM on a certain day, on a share at 100p, the selling price at the same time may be 95p (that’s just in case you want to ‘sell’). So if you bought and sold immediately you lose 5p. In reality sell or buy price are stated in points. So a share of 100p may be referred to as 100 points. A share costing £100 may be sold at 10000pts. Usually price changes by a point on the last or second to last digit (it’s important to check of course). So if you bet £1 on price at 10000pts and price goes up to a selling price of 12000pts (and you sell at that) you make 2000 x £1 = £2000 in profit. In the opposite direction – you lose £2000. This sort of thing is referred to as leveraging (video above would have explained).
You can also sell (go short on) an item at 10000pts and buy it back at 8000pts, in which case you make 2000 x £1 = £2000 profit. How does that work? It’s like you borrowed a friend’s caravan brand new. You sold it – unknown to him (forgetting the morality or legality for a moment) – for £10,000. He’s gone travelling for 6 months. He calls up two weeks before to say he’s coming back. You quickly by back the caravan at £8000. You give it back to him in good condition – and he’s pleased. You pocket £2000. But hold on – this is just an example of how selling what you don’t ‘own’, makes a profit. I’m not saying that there is anything illegal going on in spreadbetting. I wouldn’t be part of that!!! The mechanism for spreadbetting is perfectly legit within the rules. Whilst the caravan was a tangible asset, in spreadbetting you’re not selling a tangible asset. There is no ‘ownership’. I can’t go into the depths of it. It will require some googling, if you want to find out more.
Bet size is something you determine (and is limited to certain amounts by brokers, in case you were thinking to bet £500 and make a 10pt change to collect £5000.) Most importantly because you’re not buying a stock (which is a tangible asset), you don’t own anything. Hence, there are no stock-broker fees, commissions or stamp duties to pay. There are some smaller charges however, and they are really small like less than a few pence for certain trades – and you can always find out what those are in advance of placing a trade.
“But you said ‘sell’ – how can you sell something you don’t own?” ‘Sell’ is a funny word in this game. The mechanism of doing so is that you effectively borrow from the broker (seamlessly) to sell and then you buy back (seamlessly) when you get to a different price (likened to the caravan analogy above). If the different price is in your favour, you make a profit. If it isn’t in your favour, you’ll have made a loss and the broker would have made a profit. How does the broker make money – is a question that often pre-occupies many people. I can’t go into the intricacies of that. I think that most people who are new to this want to know because at first glance is seems like ‘all a scam’ – and nobody wants to be scammed. My advice, if it’s really a burning issue, would be to google for how it works or call up one of the brokers and ask them. But rest assured spread-betting has been around for over five decades. It is well regulated by the FSA in the UK. Why you have not heard of it until now – I don’t know. Maybe you’ve been too busy at work or hiding from so many scammers that you just passed it over rather swiftly.
Is it a get rich quick scheme?
The short answer is NO! If anything, this is a get-poor-quick scheme for people who think they can just watch a few YouTube videos, have a go and make thousands or millions. In essence, it requires an extreme amount of training to acquire the knowledge, skill and experience (KSE) to become successful at it. Successful means profitable in the long term. Only about 10% of people who flirt with spreadbetting stay with it for the long haul. Of those only about 1% will make it big in terms of healthy long term profits. Why is that? The reasons are many but it’s simply because of the time and effort required to become successful. Also most people cannot stand losses or losing.
Losing? Hold on!! I’m talking about two types of people:
a) Those who wade in stupidly with their own cash at the outset, and/or
b) Those who try demo accounts and blow up £20,000 or more in demo money. After blowing up about 40,000 in demo money, most people will say, “Sorry it doesn’t work for me – I can’t do this”. Well, it’s not there to work for you. You’re there to work it, to make it happen. So it’s about you failing to work – and you certainly don’t get paid for no work! This is not employment, where even if you do a sicky for two weeks you still get paid – or if you’re suspended you may still get paid for a certain period. It’s you and the markets – that’s it. You’re the boss of you! You make it happen or you don’t.
About winning and losing
But there are some strange things to know about spreadbetting success:
1. Only about 40% of trades made by well trained traders will win.
2. 60% of trades made by well trained traders can be expected to lose.
So how does anybody make money like that? Simple math: 40% of trades are very big winners and 60% of losing trades suffer much smaller individual losses. “How long would it take me to learn how to do it well?” – is the rather silly question that many ask. This is not a university programme! You are totally in charge of your training. You may spend thousands (of whatever your currency) attending courses and still not become good at it. Some spend nothing, but through dedication and study gain the required KSE. Oh really? Yes – really!
So what’s the secret of success in this?
Before launching into that – ask yourself this, “How would I make my income the equivalent of an additional £100,000 tax free per annum, in 5 years time?”. The stupidly simple answer is that you couldn’t do it if you did not have time to invest in acquiring new skills. So time is your first big enemy. In fact I’d better make a list of ‘enemies’ on this:
1. Lack of time
2. Lack of sustained motivation over a long period.
3. Lack of dedication and commitment.
4. Lack of determination.
5. Inability to withstand failure after failure (ideally on demo accounts).
6. Inability to learn new skills ]
7. Inability to learn from mistakes, and stop repeating them. People often learn what their mistakes but repeat them for quite some time, then blame some external thing.
8. Having a go and hoping to win. Hope is the enemy in this. The markets are there to kill hope –and it does so very quickly. If hope would win the day, then everybody would do this and be millionaires.
All of the above actually account for failure at almost anything requiring acquisition of high-level KSE. You can’t become a successful doctor, lawyer or chief executive if you’re lacking in all the above!! Well okay – accidents and miracles do happen on occasion. So if you want a job paying £100,000 tax-free per annum on top of your regular job, and you’re lacking as in the above and can’t change your ways or your constraints, my honest suggestion is to leave this off. Don’t even waste your time trying it. Don’t try this if you’re in doubt about the above ‘enemies’ being inseparable from your existence in the immediate or longer term.
For those who would say, “You’re quite rude – aren’t you!? I thought you were here to help!” – I am helping! I’m helping people to save their time, money and effort by being totally frank about this. If frank is rude – then fine, I am rude.
How much do I need to put in?
Note that ‘lack of money’ to invest, is not on the list above. Why? Because you don’t need real money to acquire the necessary KSE. If you acquire the KSE on demo accounts, you’ll know when it’s right to find the money – and boy you will!! (by legitimate means of course). I’ve focused squarely on KSE instead of how much of your money to ‘put in’. You should put in no money, unless you have demonstrated quite clearly that you’ve acquired the requisite KSE – and based on that evidence of winning performance (overall), that you’re confident to put your own money in. I can’t tell you how much to put in. But I can say – it must be money that you are prepared to lose. If you can’t afford to lose money, then stick with demo accounts – or just leave all this alone.
Scroll to the 1:50min mark in this video below – and BTW, some say she’s a very well trained actor. ‘Some’ should leave all this alone now. This post and the videos are not here to ‘convince’ you to do anything. Nobody wants your money here or to make a profit from you by engaging you in some elaborate plot. But you don’t know that – so there is no loss to anyone if you do nothing. If you leave clutching your wallet and credit card, you’ll feel much better.
Having considered all the above, it should now become apparent why 90% of people never look at spreadbetting or flunk out rather quickly. For sure, spreadbetting is not for everybody – even if it is available to everybody.
This last video explains the ways that traders adopt a losing ‘psychology’.
What’s next? Nothing! You’re in charge – this is not a course to teach you what to do. I’m not here to make you into a millionaire. Okay? For those who lack the ‘enemies’ above, a recommended trading demo trading platform is to be found at www.etxcapital.com (and no we don’t get any commissions or cuts from them). There are several others out there. Youtube and Google are your friends but beware of idiots out there who would say ‘do this’ or ‘do that’, or ‘sign up for this and you’ll get rich’. You’ve been warned.
Bonds – what they are and their importance
There is much confusion out there about what bonds are. I’ve seen so-called experts getRead More
Conversation with a failed trader
Today I met a chap who is a failed trader. This was a rare opportunity.Read More