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What are the assets you can trade?
If you are interested in long-term investments, and you won't need to take back your money in at least five years, index funds can be the best choice. This type of investment is also suitable for beginners since the risks are lower. Besides, the variety is wider.
Perhaps you have a different idea, but it is not easy at all to beat the market (yes, you have probably heard of investors who achieve huge profits).
But putting aside some unusual cases (like Warren Buffett's), all that glitters is not gold: if you hear of someone who has beaten the index, they have probably done so for a short period, or will charge you so many commissions that it ends up being better for you to index (whit minimal commissions). Besides, take into account that if something happened once or twice, it doesn't mean necessarily that it will happen again.
With index funds, you don't have to worry about that: most of the time, they beat active managers in the long term, and the rates are so much lower.
Have you heard about Exchange-traded funds or ETFs? They are similar to index funds and are known for merging the advantages of stocks and mutual funds, because they can be traded regularly at market price, but have much more diversity and the rates are significantly lower.
About Contracts for Difference
It is possible that you have seen the initials CFD repeatedly if you entered this broker before. Before we come back to it, you must know that cryptocurrency operations on this broker are only CFDs when you short sell or select leverage above x2 (but this is not even available on this broker).
We will also explain concepts such as leverage and “going short”, in case you are considering day trading cryptocurrency or more advanced practices.
this broker allows you to bet both “in the black” and “in red”. In a hypothetical case: you have the certitude that the IOTA will go down, so probably you think that the best thing to do is wait until it does and then go in. Nevertheless, if it actually goes down, you can earn some money out of that.
You can accomplish that by “going short”. Here's how it works:
- You ask someone for a loan of, let's say, 100 units of IOTA, which total value at the moment is $ 5,000 (obviously, these figures are made up)
- You sell the 100 units at $ 5,000
- The IOTA goes from $ 50 to $ 30 (as you calculated, the value decreases)
- You obtain the 100 units again, but at their current price, $ 3,000
- Now you return the 100 units to the loaner
- The rest is yours, so, you will have made $ 2000
Take into account that it sounds much more complex than how this broker CFDs actually work: we can summarize this whole operation by saying that by trading in IOTA you can also earn money if you predict the downs.
What is leverage
In case you still don't know what “leverage” is, we'll describe it briefly. When trading, it's the capacity of multiplying your investment without putting extra money. For example, if you start with $ 100 and you use x2 leverage, you will be investing $ 200.
Leverage, Take Profit and Stop Loss
Let's say now that you are sure that the price of IOTA is going to raise its price, and you decide “going long”.
You are absolutely certain that IOTA will rise, and you have $ 1,000 at that moment, but the fact is, you have the chance of investing more.
Perhaps you could go to your bank, request a credit, wait for it to be accepted and receiving the money, send the money to your broker, confirm that it arrived, and then acquire IOTA… But maybe once you have made all that, your prediction could've been confirmed already and IOTA is so high that it is not worth investing.
Leverage is exactly like a loan, but it is only a few clicks away! You will be able to operate with much more than what you have on the platform's wallet. It is simple, before investing you will see the different options as in the screenshot:
When operating with other kinds of assets you can use more leverage. The reason is that leverage is most common in short-term operations, and cryptocurrencies tend to be a medium or long-term investment. But let's see how leverage works.
You begin with $ 1,000 and decide to use leverage x2, which means you would really invest $ 2,000 (the extra $ 1,000 to reach $ 2,000 are “borrowed” from your broker).
A few days later, as you thought, IOTA increases by 20% and the value of your investment is now $ 2,400. But you don't want to take too much risk, so it's time to sell back.
You will have to pay back the $ 1,000 of leverage and you will have made $ 400 (since the other $ 1,000 was your initial investment).
In conclusion, by investing $ 1000 and obtaining $ 400, your net profit would be 40%. That is pretty decent.
Does it sound too good? The thing is, you can also lose money. If everything goes according to plan and the price goes up, you will earn profits in little time; but if the opposite happens, you will also lose more really quickly.
Let's imagine that the price didn't increase by 20%, but it went down also by 20%, you won't lose $ 20 but $ 40, because of the leverage. Therefore, when using leverage it is very important to be familiar with two other concepts: Take Profit and Stop Loss.
Take Profit is the automatic sell order that is above the entry price: you buy IOTA at $ 100 and you ask your broker to close your operation as soon as the price goes up to $ 120. It is very useful to avoid being blinded by enthusiasm: a 20% profit is usually pretty good, but once you see it goes up, you might want to gain a bit more and decide to wait, but this could be a mistake. So, Take Profit helps you to trade more safely.
Stop Loss is even more important, particularly if you use leverage, because a reduced loss with leverage can have a significant impact on your wallet. Consider that your broker will recommend a limit for Stop Loss, but you should place it closer to current price than that.