The world of trading can be complex when looking at the array of financial products and company’s available. For the untrained eye this can be very confusing and overwhelming to know where to start and what to trade. You would have noticed that if you have used the term trading in any of your social media searches you will be inundated with ads from various trading companies around the world. They will be offering all sorts of things to get you to trade with them; low fees, free education courses or tight spreads.
So, the question is which ones can you trust, and which products should you use to trade a view on Financial markets?
Let’s face it, most new traders will get themselves into trouble at some point usually within their first year. I have been training and advising both experienced, and beginner traders since 2012 and have heard many great and awful stories. Most of the bad stories come from traders that are uneducated and don’t know what they are doing. The awful stories are the people in this category that have lost much more than they were expecting. Most have traded a product that allows them to lose much more then what is in there trading account.
“The biggest issues with some of the derivative products out there is they are over leveraged.”
Leverage is one of the main reasons many traders are attracted to derivative products. They allow someone to generate a large return using a small trading account vs buying the underlying instrument directly. The big problem with this is that it will also come with larger losses. Don’t get me wrong leverage can be a very powerful tool to those who know how to wield its power. But some products just go too far. I have a very strong belief that you shouldn’t risk more than you can afford and most CFD products allow you to do this.
The main reasons I trade Mini warrants:
They are leveraged but not too leveraged. Mini Warrants are still leveraged but you cannot lose more than what you outlay on the trade. Also, there is a range of strikes to pick from that are more levered (or geared) than others so you can find something to fit your risk profile. Most importantly there is no margin needed to cover risk.
Margin on CFD’s can be very unpredictable in a volatile market and no one enjoys getting a margin call and having to put more many in than expected.
Solvency risk, Mini warrants are listed and traded though the ASX and Chi-X which are highly regulated exchanges. CitiFirst is the only company currently providing Mini warrants in Australia.
To access them you need an account with an Australian broker. The great thing here is that the trade sits on your HIN and the money in a bank account in your name. If the broker goes under you can simply transfer your holdings to another broker and continue to trade. This also allows you to do all your trading and investing in one place as you can trade all ASX listed shares and products in the same account.
With CFD’s, both your trade and money sit on the businesses balance sheet, if they go under you will be waiting a long time to get your money back, if any at all. This is a real risk as many CFD companies around the world have gone under over the years.
Mini warrants are very simple to understand, their simplicity allows the trader to concentrate on what is most important which is picking the market direction. No margin, limited risk, and they are available to trade Commodities, Currency’s, Futures and around 200 Australian listed shares.
Mini’s have an imbedded stop loss feature that helps offset stock shock. Spreads are very competitive, and liquidity is tied to the underlying stock as CitiFirst is effectively just buying or short selling the stock on your behalf.
I trade both Mini Warrants and Exchange Traded Options on the Australian Market. Mini Warrants for more directional trading and Options for the flexibility to trade volatility and time decay.
If you are considering getting into to trading, please take your time, make sure you get Educated and start small. You should ensure you understand how to calculate Risk and Reward to ensure you are making sound investment decisions that suit your own risk tolerance. You need a trading plan that will tell you when to enter and exit your trades.
If you are considering trading CFD’s please read – https://www.moneysmart.gov.au/media/173820/thinking-of-trading-in-contracts-for-difference-cfds.pdf
Happy Trading,
Tim Michaelides