Before you start trading, you should always be aware that investing comes with a certain degree of risk. As such, you should only engage in trading if you can afford to risk your funds. Here, we have outlined some best practices and guidelines that will help you ensure that you don’t end up spending more money than you have.
Never invest more money than you can afford to lose.
This one is a pretty simple rule of thumb. Only invest as much money as you feel comfortable losing. Anything over this amount might not be worth the risk and can end up as cause for concern. Even if you come out on top, sometimes the stress is not worth it.
Additionally, investing your capital makes it much more difficult to liquidate and access, should the need arise to use it for other purposes. As such, it is always advisable to spread it around and have cash available at all times.
Contracts For Difference (CFDs)
Contracts for difference (CFDs) are an increasingly popular choice for retail investors. This is particularly true for those who might not have the necessary capital to make large investments. While with CFDs, investors are not required to put up the entire amount of the investment, they do not receive the underlying asset either. Instead, they receive a contract for the monetary difference in price between the time of opening and the time of closing the trade.
CFDs are not always optimal, as leveraged trades can result in margin calls or other situations where the investor loses their funds. Furthermore, in some cases, investing in CFDs can result in you owing money to the CFD provider. Trading in this advanced instrument should only be done if you have a complete understanding of how it functions.
Shorting is a very popular investment strategy that is practiced by investors of all sizes. Usually done when investors believe that a certain asset will decline in value, shorting essentially means borrowing the asset for a specific period of time and selling it. Once the price drops to the expected amount, the trader will buy it for the lower price and return it to the lender. The difference between the two prices is the profit that the trader makes.
While a completely legitimate and highly effective technique, shorting can be risky. If your predictions are wrong and the asset fails to drop in value, you might end up spending more money to buy it back in order to return it to the lender. As such, only experienced traders should engage in this practice, and even then, hedging your investments is always a smart idea.
Licensing and Regulation
When investing online, it is always important to make sure that the trading platform or exchange you have chosen is properly licensed and regulated. This will ensure that it is trustworthy and you can safely deposit your funds and other assets with it.
Trusted platforms and exchanges are usually overseen by one or more regulatory bodies in the regions where they operate. These keep a close watch over operating companies and ensure that they do not engage in any unlawful or deceitful conduct. Such regulators will also provide wronged customers with legal support should any issues arise. Some of the most trusted financial regulatory bodies to look for include the Securities and Exchange Commission (SEC), the Financial Conduct Authority (FCA), the Cyprus Securities and Exchange Commission (CySEC), the Australian Securities and Investments Commission (ASIC), and the Financial Crimes Enforcement Network (FinCEN).