What do I mean by trading? I’m talking about looking into the profitability of trading the financial markets: forex; stocks; commodities; etc. On first glance, it seems like there’s a lot of money to be made here. You could be forgiven for thinking that places like London and New York have built their wealth from them. If you’ve ever travelled to London, you can’t help be impressed by the view of Canary Wharf on the skyline, and you’ve seen the film Wall Street haven’t you? Watch it if you haven’t. Classic.
So how do you make money from the financial markets? Well, a lot of people trade, which as far as I can see, means buying stocks, shares, etc., at one price, and hoping to sell them at a profit. It’s a multi billion pound, dollar, whatever other currency you can imagine, industry, so like with all places where large sums of money are at stake, I imagine that it’s also probably a bit of a bear pit.
I can see the attraction of trading. The opportunity to make vast sums of money, just you and your pot of cash, pitting your wits against the ebb and flow of the marketplace. No customers to please, products to make, staff or premises to pay for. All you need is a phone, computer, and a fairly decent internet connection.
However, trading is a potentially expensive occupation. I would say that you need a fairly large pot to start with if you hope to make any decent money. You need the cash to buy the stocks, commodities, currencies, and every time you buy something in the hope that it will rise in value there is a stock broker commission to pay for that trade. This means that either the value of the trade will need to have been large enough, or the trade will need to have increased in value a large enough amount, to offset the commission for placing the trade in the first place. With a small pot of cash like mine, I can probably rule this out as a viable option. It’s a big boys game.
So are there any options out there in the financial market for the little guy? Well, yes there are in theory. Spread Trading is one. More commonly referred to as Spread Betting. Interesting. So why do you think it is referred to as betting? I guess the main concept here, whether you’re actually buying stocks and shares, or so called Spread Betting, is that you are trying to predict the FUTURE value of something, and this is very similar to the more traditional vision of betting where you try and predict the FUTURE result, of say a football match or horse race. The financial markets may have more of an air of respectability, or maybe not if you think of fairly recent news of “Banker Bailouts” and “Financial Scandals”. In fact, the more you look into dodgy practices, to make a fast buck in the financial markets, the more dirt you find, so perhaps the markets just have the financial capital to invest to make themselves seem respectable. Just a thought. Anyway, regardless, it is a huge market, which attracts a huge amount of investors, and traders, with the potential promise of making vast sums of money, or should I call them customers? I think it’s probably the market makers of the financial markets that make the most profit from the commissions they charge on every trade. Much like the casinos who have an inherent “house edge” with all the games of chance they offer, or the online poker sites who have a “table rake” for every hand dealt. You can probably see the game here. Imagine charging one pence a game, but a thousand games where played a minute. That’s £10 a minute, or £600 an hour, 24 hours a day, 365 days a year, somewhere in the world. These are just made up numbers to prove a point. I’m sure the actual numbers are much larger. Basically, trading something in the financial markets is just the equivalent of cleverly packaged game.
Having said all that, people love games. They especially love games if there’s a chance of winning vast sums of money. So what are the chances of winning at trading? Well if you belief the numerous statistics on the internet, it would appear that the less than 5% of people become successful traders. Interestingly, the success rate is higher for women, but in reality, probably only marginally. Trading, unlike investing, is a zero-sum game. Well, actually, a negative sum game if you take into account broker costs. It would seem like as long as the game exists, the only people that consistently win are the brokers. However, the size of the market is vast. The forex market, for example, which seems to be the largest by far, where 90% of the volume is generated by currency speculators, is worth roughly $5.3 trillion a day, or $220 billion an hour!! You can understand why the market is so popular, and with less than 5% of traders making the money, you can imagine the profits for the few. Is this any different from say the chances of becoming a well paid football player? The chances there are reported as less than 1%, and it no doubt has less longevity.
So you’ve seen the odds of winning the game, and don’t have much money to start, but you still like the idea of winning in one of the biggest games in town. I would say under these circumstances treat it like a hobby. What I mean is look after your expenses first: rent; food; clothing; bills; living expenses. If you have spare cash and time after that, why not try and win the trading game. It is just like any other hobby where you spend money on the enjoyment of the pursuit without any immediate returns. You might pay for golf club membership, and invest time and effort in lowering your handicap, but there is no guarantee of joining The Tour. You might enjoy painting, and spend money on materials and canvases, and time perfecting your craft, but you may never sell a single painting, let alone be shown in a gallery. All I’m saying here is, do it if you enjoy it, but only do it with money and time that you are prepared to lose. After all, in all walks of life, no matter the odds, some people win. You’ve got to be in it to win it, and all that.
I’ll take a closer look at Spread Betting next time. For now, as always, wishing you all health, wealth and happiness.
Whilst I remember, for all of you out there with some Chinese heritage, happy new year for tomorrow, or maybe that should be xin nian hao and gong xi fa cai.