Financial instruments you can operate with
Have you heard about Exchange-traded funds or ETFs? They are passively managed funds, known for merging the advantages of stocks and mutual funds, because they can be traded at any moment in the market, but have much more investment possibilities and considerably lower rates.
Index funds are most adequate for those planning to invest for the long term, especially for beginners. If you don't need to use the amount of money you'll invest in less than five or ten years, index funds offer you security and diversity.
Unlike a lot of people think, benchmark returns are very difficult to beat and very few fund managers have done it, apart from some specific cases.
In practice, all that glitters is not gold: if a fund manager achieves to beat the market, it is only for a short time or on a specific occasion. Or perhaps they would charge very high fees and indexing would be a better decision.
With index funds, you don't have to worry about that: they usually beat active managers in the long term, and the rates are minimal.
Forex or currency trading allows obtaining profits by exchanging one currency for another.
If you decide to trade the EUR/USD pair, for example, you buy euros at their price in dollars, with the expectation that the first currency (the euro) will raise its price compared to the second (the dollar), to make a profit by selling it. Suppose you entered when the price of one euro is 1.10 USD and you exit when the price has gone up to 1.15: that margin is yours once you sell again.
Perhaps you already deducted this, but trading with foreign exchange usually implies investing a lot, because prices rarely increase that much, or using much leverage, which could be incautious, as you know. Our recommendation for those starting in the world of trading is to choose another market to begin with, since Forex is risky and complex.
You can exchange with almost every popular currency on this broker. However, remember that Forex works with CFDs, therefore you will not be the owner of the underlying asset.
About Contracts for Difference
If you already have been on this broker, you must have noticed that the initials CFD appear all the time. We will come back to it, but first, you should know that cryptocurrency operations on this broker are only CFDs when you short sell or leverage over x2 (and the platform does not even allow this).
We will also refer to concepts such as short-selling and leverage, in case you are interested in day trading cryptocurrency or more advanced operations.
The advantage of this broker is that it allows you to bet both “in the black” and “in red”. Let's say that you believe that the Coinbase will fall, so perhaps you consider that it is better to refrain from getting in until it does. However, if it really falls, it might mean extra money for you.
You can accomplish that by “going short”. Here's how it works:
- You ask for a loan of, let's say, 100 units of Coinbase, which cost $ 5,000 at the moment (obviously, these numbers are made up)
- You sell the 100 units at $ 5,000
- The Coinbase devaluates from $ 50 to $ 30
- You buy the 100 units again, but at their current price, $ 3,000
- You return the 100 units
- The difference is yours, so, you will have made $ 2000
It is far more simple than it may seem. Just take into account that by trading in Coinbase on this broker, with CFDs you can make a profit if you foretell downs in the price.
Trading with leverage
If you are not familiar with the term “leverage”, we'll put it short. When trading, it's the capacity of multiplying your investment by borrowing money from the broker. For example, you can enter with $ 100, but if you leverage x2, your initial investment will be $ 200.
Leverage and the importance of “Take Profit” and “Stop Loss”
Let's pretend that you are confident that Coinbase will rise, and you want to “go long”. You have $ 1,000, but you actually can invest more and make more money.
There's the possibility of requesting a credit, but you must know that all the process takes time, and by the moment you finally get the money, Coinbase might be already at a much higher price, so you wouldn't be able to invest the way you planned.
Leverage is just like a credit, and you will only have to click a few times! You will be able to invest (and earn) much higher amounts than what you actually have on the platform's wallet. It is very simple, before investing you will see the different options as in the image below:
When operating in different markets you can use more leverage. This is because cryptocurrencies usually represent medium-long term investments. However, leverage is used mainly for day trading or short-term trading. That said, I'm going to explain better how leverage works:
- If you want to invest $ 1,000 and you use leverage x2, you will be starting with $ 2,000 ($ 1,000 are a “loan” from your broker).
- A few days later, Coinbase price does rises, as you assumed, and now the price of your investment is $ 2,400 (20% more), so you decide to sell back.
- Once the $ 1k from leverage is returned, you will have $ 1,400 left; which means the net profit is $ 400, since the other $1,000 was yours initially.
By starting with $ 1000 and getting $ 400, you'll be earning 40% of your investment.
It may sound too good to be true. The trick is that the risk of losing out also increases. If everything goes as planned, you will earn profits in little time; but in the opposite case, you will also lose more really fast.
For example: if instead of increasing by 20%, the price falls by 10%, you do not lose $ 10, but $ 20, because of the leverage. For that reason, when using leverage it is crucial to take into account Take Profit and Stop Loss.
Take Profit is a trading limit you can set for your assets: you ask the platform to sell them 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 goes up to $ 120. It is very helpful to avoid being blinded by greed: we would all accept a 20% profit in the beginning, but when you reach that 20% it is easy to ask yourself “what if this keeps going up and I can earn even more?”. It's like you made sure now of not acting recklessly in the near future.
On the other hand, when operating with 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. You always need to mark a Stop Loss more tight than that suggested by the broker.