What assets can you trade?
Meet the Exchanged Traded Fund
Have you heard about Exchange-traded funds or ETFs? They are passively managed funds, known for combining the benefits of stocks and mutual funds: they can be exchanged at any moment in the market, but include a much wider diversity of assets and considerably lower fees.
About Contracts for Difference
It is possible that you have found the term CFD repeatedly if you already registered on this broker. Before we explain this further, you should know that cryptocurrency operations on this broker are only CFDs when you are short-selling.
For the record, and if you want to try at some point day trading cryptocurrency or other trading practices, next you will also find concepts like going short and leverage.
With CFDs you can operate on the platform even if you are “in red” or don't have a positive balance. Let's say that you are sure that the Coinbase will go down, so probably you consider that the best thing to do is wait until it does and then go in. However, if you are pretty sure that it is going down, why not making some profits out of that?
You can do this through what is known known as “going short” which consists in something like this:
- You get from a loan 100 units of Coinbase, valued at a total of $ 5,000 (these numbers are imaginary)
- You make $ 5,000 by selling the 100 units
- The price falls, as you guessed, and the unit of Coinbase now costs $ 30 instead of $ 50
- Again, you buy the 100 units, but at the current price, $ 3,000
- You return the 100 units
- The $ 2000 difference is yours
Keep in mind that it seems much more complicated than how this broker CFDs actually work: we can just say that by trading in Coinbase you can also earn money if you foretell the downs.
What is leverage?
Do you know the term “leverage”? Just in case, we'll put it simply: another advantage of trading is that it lets you invest even more than you can have in a given time. That is, if you enter with $ 100 and you choose to leverage x2, you will be really investing $ 200.
Leverage, Take Profit and Stop Loss
Let's say that you are confident that Coinbase will rise, and you consider “going long, but you only have $ 1,000 available. However, you have the option of investing more money and earn higher profits.
Possibly, you could ask a financial company for a credit, put an asset as a guarantee, wait for it to be accepted and receiving the money, and then acquire Coinbase… But by then it is possible that your prediction was confirmed already and Coinbase price is at such a high price that it is not worth trading.
Leverage is just like a credit, and you will only have to click a few times! You will be able to operate with much more than what you have on the platform. It is really simple, before investing you will see the different options as in the screenshot:
Trading with other assets allows you to use higher leverage. The reason is that leverage is most common in short-term operations or day trading, and cryptocurrencies tend to be a medium or long-term investment. Let's talk a bit more about how leverage works:
- If you decide to invest $ 1,000 and you use leverage x2, you will be starting with $ 2,000 ($ 1,000 was borrowed from your broker).
- A few days later, Coinbase price does increases, as you thought, and now the price of your investment is $ 2,400 (20% more), so you decide to sell back.
- Once the $1,000 from leverage is deducted, you will have $ 1,400 left; which means you've earned $ 400, since the other $1,000 was yours initially.
By starting with $ 1000 and getting $ 400, you'll be earning 40% of your investment. That is pretty good.
But there's always a drawback. If everything goes ok and the price rises, you will make profits. Nevertheless, if the price goes down, you will also lose more money really fast.
Let's suppose 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. Because of that, the concepts of Take Profit and Stop Loss are fundamental when operating with leverage.
Take Profit is a limit you can set when trading: you set the platform to sell your assets once they get to a point above the entry price. For instance, you can buy Coinbase shares at $ 100 and request that your position is closed automatically when it reaches $ 120. It is very useful to avoid being blinded by enthusiasm: we would all take a 20% profit in the beginning, but when you reach that 20% it is easy to want some more and put yourself at risk of losing money. It's like you made sure now of not acting recklessly in the near future.
On the other hand, when using leverage you also have to use Stop Loss, because a small decrease in the price of an asset can have a big impact on your wallet. Consider that your broker will recommend a limit for Stop Loss, but you should set it closer to current price than that.