How Online Stock Brokers Make Profits

Trading Opportunities and Risks: A Beginner's Guide

Trading is often seen as relatively little work with high returns - but the opposite is the case. Hobby traders therefore have to consider a few things before they can get into the game with the markets.

Trading describes the short-term buying and selling of financial instruments such as securities, currencies, commodity certificates or the so-called contracts for difference (CFD). Trading is practically the opposite of long-term planned investments. Most traders wish to earn a comparatively large amount of money with little effort in a short period of time.

However, if you want to bet on trading, you should always be aware that this is basically speculation. Traders try to predict market developments and use this to their advantage. Where a trader invests his money is usually of secondary importance to him - it is not about buying a share in a company and participating in its development over the long term. For example, a trader buys a share, hopes for a price increase and then sells it again immediately - often within a day (intraday trading). The difference in value minus the transaction costs, for example the brokerage fee, is the trader's profit.

Online trading: trading in real time

Buying stocks and selling them two hours, two minutes, two seconds, even two milliseconds later at a better price was almost unthinkable for private investors in the 1990s. It took too long to buy shares over the phone, fax, mail, or directly from a bank branch. With the Internet and online trading, however, almost everyone now has the resources of the professional investors of yore. If you want to start trading, you theoretically only need a computer and a stable, fast internet connection. Information can be obtained quickly over the Internet, and share purchases can be made with a click of the mouse.

Intraday trading has also received a boost from technical progress: "Day traders" open and close positions within a day. The magic word for traders is volatility, the fluctuation of a price. The higher this is, the greater the chance of both winning and losing for traders. In the absence of volatility, on the other hand, traders have poor prospects of big profits.

In the meantime, some apps have also established themselves that enable mobile online trading. These apps provide various features, such as a chat or the ability to transfer cash and deposit checks by taking photos with the phone camera.

Online trading and what you need for it

In principle, you do not need any special software if you want to buy and sell financial products on the Internet. All you have to do is register with a direct bank or online broker and open a securities account. There are numerous providers of such depots, all of which offer different conditions. Important key figures for the portfolio comparison are, for example, the basic fee for using the portfolio and the costs per order.

Day traders in particular not only trade with normal securities, but also with CFDs (contracts for difference) or with foreign exchange (forex trading). There are specialized brokers on the net for these speculative forms of investment, which beginners should better not venture into. Most of the providers lure with a free demo account in which small investors can invest in CFDs and foreign exchange with virtual money.

Curves, charts & stock market news: a trader's tools

You may know the picture: stock market traders are sitting in front of many screens that display curves, tables and figures. Even a professional private trader usually has several screens on his desk. The trading platform to which the trader is logged in can be seen on a screen. This is where he earns his money: with a click of the mouse he buys and sells stocks, foreign exchange, commodity certificates and other securities. On the other screens, the trader observes the development of the markets, for example the DAX on the Frankfurt Stock Exchange, the American S&P 500 share index or commodity futures exchanges such as Euronext, on which commodities are traded.

The courses change almost every second. If it flashes red, it means falling prices, green means a price increase. A feed with the latest economic and financial news indicates possible changes. Professionals also rely on risk management software and other tools that are supposed to make the course of the curves predictable.

There are numerous variations of curves for the course. The candlestick chart is particularly popular among day traders. The trader can see the movement of the price at a glance, including the opening and closing price. The upper “wick” or the lower “fuse” indicate the distance to the high and low of the respective interval.

What Traders Trade: Stocks, CFDs (Contracts for Difference) and Foreign Exchange (Forex Trading)

The classic products that traders trade in include stocks. Traders watch the market and then try to buy or sell at exactly the right moment. Of course, nobody can predict the course of the course, but experienced traders develop a feeling for the market over the years - provided they can hold out that long. Especially at the beginning of a trader's career, luck must also play a role when traders bet on a certain share performance.

To many traders relying solely on the rise and fall of share prices seems too one-sided - and not very lucrative, especially in comparison to other investment products. With CFDs, for example, traders conclude contracts with a broker: one party assures the other that it will pay the difference between the current value of a price and a future value. CFDs, also known as contracts for difference, are basically instruments for betting on price developments (for stocks) and changes in value (for commodities, currencies). Foreign exchange trading, or forex trading for short, is another lucrative alternative to normal stock trading. This is basically about how two currencies relate to one another.

CFDs and Forex trading promise high profits - and losses - with relatively low stakes. This is made possible by what is known as leverage: the trader only invests a small amount of his own capital, the rest is borrowed by the broker. Nevertheless, the trader benefits completely from the price fluctuations - or is liable for them: Because with leveraged financial products he can gain a lot, but also lose just as much.

Don't speculate

CFDs and Forex trading are highly speculative and therefore very dangerous, especially for trading beginners. In the USA, trading in CFDs from England is even prohibited. Therefore, the intricacies of these financial instruments are not discussed further here.

Learn to trade: how does it work?

There is no uniformly regulated training to become a trader. Numerous - sometimes self-appointed - trading professionals offer short-term seminars, mostly online and often, it seems, with hidden costs. If you want to try trading, a free demo account can be a way. Watch out for cost traps and don't rush to trading real money if the trial trades go unexpectedly well.

There are various rules of conduct among professionals that are designed to prevent excessive losses. They can be summarized under the umbrella term "self-discipline". In an interview with German investor television, the well-known German day trader Birger Schäfermeier said, for example, that traders absolutely need their own rules and should strictly adhere to them. Exceptions could often have fatal consequences. Schäfermeier also noted that day trading is out of the question for thoughtful, conscientious people.

Professional traders usually pursue an individual system that they have often acquired over the years. No successful trader buys a stock indiscriminately and hopes that it will behave according to his ideas. Professionals plan exactly what to buy, when to buy, and when to sell again. The traders protect themselves against losses with a so-called stop-loss order, which means that they exit automatically when the price falls below a certain limit. It is also part of money management, as traders describe their capital preservation strategy, to limit the stake per trade and the total stake in trading. The stake per trade should not be higher than one to two percent of the deposit value, the total trade stake should not exceed 10 percent.

Trading strategies: chart analysis and Co.

Some trading strategies have emerged with the business, however reliable success of such strategies cannot be guaranteed due to the unpredictability of the market. Renowned economists like the American Eugene Fama are of the opinion that no participant in a financial market can be successful in the long term through analysis or other methods.

Numerous trading strategies can be summarized under the umbrella term chart analysis, it is also known as technical analysis. Chart analysts try to use historical data to predict the best possible time to buy and sell, for example a share.

In the chart analysis, the traders check anomalies and patterns of the price development. For example, if a stock has already reached a similar high or low several times, analysts speak of resistance or support. If the price moves in a similar direction, up or down, for a long time, traders refer to this as a trend. From the interaction of all these key figures, the traders try to predict the probability of the further course of the curve in the chart analysis.

With certain strategies, traders try to rephrase certain properties of prices in numerical values. The trend following and momentum strategies are among the most popular trading strategies.

Trend following strategy

This strategy, which is also suitable for beginners, is based on the well-known phrase “The trend is your friend”. Simply put, the trader assumes that trends will continue. The probability is high that a falling price will continue to fall or a rising price will continue to rise. Analysis programs for traders can also show the trend of a stock in numbers.

Momentum strategy

With this strategy, traders try to determine when the price of a stock is accelerating. The theory is based on the assumption that prices often move sideways for a long time and then suddenly rise or fall sharply. This immediate change in momentum is intended to be timed to buy or sell in a timely manner. To determine momentum, traders divide current prices by past prices. This results in a graph that is also known as the momentum curve.

Trading: a high risk job

Successful traders with a good hand can make a living from their business; their income is theoretically unlimited. However, the reality of many traders is very different: studies on the subject, including from the University of California, show that very few day traders actually earn anything. The only constant winners are the brokers who collect fees for every trade executed and also benefit from speculative trading.

Trading has little to do with the imagination of many people: Instead of confirming a bomb-proof trade with a few clicks of the mouse from the comfort of your home and thus having worked out your daily target, professionals spend hours analyzing price developments and thinking very carefully about how and where they are invest. Professional trading is therefore no less labor-intensive than a normal job and also does not provide any income security.

The entry into trading should be carefully considered. Basically, trading hardly yields significant profits if the capital employed is not at least in the lower four-digit range. Start with a demo account and get detailed information, for example on reputable trading platforms and through specialist literature.

Only use money that you can do without

Never invest money that you cannot do without. Small investors can quickly make large losses when trading speculative financial instruments such as CFDs. And even if you do not absolutely need the capital employed, you should set yourself limits.