If you are taking your first steps in financial markets, the first thing you will think is “And where do I start?” Many traders may feel overwhelmed when they open their first demo trading account and can launch blindly. Knowing the basics of trading is an essential starting point and through a double article we will explain the main characteristics of trading, the different financial instruments with which we can operate, the concept of short and long operations, trading platforms, capital initial and what it takes to achieve success.

What is the difference between investing and operating?

Investing and operating are two different ways of using financial markets. Many newcomers to the world of finance may feel confused when differentiating between the two concepts. Below we explain what each one consists of.

To invest

The objective of an investor is to gradually accumulate equity by  buying and maintaining a portfolio of fixed, variable income, investment funds or other instruments.

Investments are usually maintained for years, or even decades. Investors receive certain benefits such as the payment of dividends, coupons and / or interest during that time. When the value of the markets falls, many investors keep their investment in the hope that it will rebound in the future. Consequently, investors seek the long-term value of their investment and are not too worried about the daily volatility of the markets.

They are the physical owners of the instruments they have purchased. For example, if an investor acquires shares of a company, he is the physical owner of a part of it and receives a certificate of ownership. Shareholders enjoy certain privileges as the right to vote in some corporate acts, in addition to the right to receive dividends on benefits.

Trading

Jeffries & Co. / NYC

On the other hand, operating implies a more frequent sale of financial instruments with the objective of surpassing the investments that are bought and maintained until they expire. They do not own the underlying asset, so traders are limited to speculating  with price fluctuations.

Therefore, they can benefit from both the ups and downs of the markets. Traders can buy an asset like any investor, but they also have the possibility to sell it without being their owner. It is what is known as short sales and what makes many people feel especially attracted to trading. It is an essential concept that must be understood and one of the main reasons why operators can overcome the results of those who acquire their investments to keep them until maturity. (We will deal in more detail with purchases and sales later.)

While investors tend to settle for an annual return of 15% depending on the risk element of the investment, some operators seek to multiply this figure, since they can benefit from both falls and market rises thanks to the possibility of sell short.

While investors tend to settle for an annual return of 15% depending on the risk element of the investment, some operators seek to multiply this figure, since they can benefit from both falls and market rises thanks to the possibility of sell short.

What can be operated with?

A financial instrument is a negotiable asset of any kind; For example, it is an asset that we can buy or sell based on a monetary value in a financial market.

Some examples of financial instruments include  currency pairs  (e.g., the currency / FX market), commodities, stock indices and company  titles  (also known as individual equity securities). Since we are not the owners of the assets with which we operate, we are actually speculating on the price of future contracts in the case of currency instruments and  contracts for difference (CFD) relating to stocks, commodities and stock indices. The price of these contracts is directly linked to the price of the underlying instrument. Therefore, any fluctuation in the price of the physical asset will cause a similar change in the price of the contract.

The reason we operate with futures and CFD contracts is mainly due to the ease in operating with them and their profitable nature. For example, if we were the physical owners of a company, we could incur additional expenses such as the tax on legal acts documented in some countries. In the futures and CFD contracts there are no such expenses (we will deal with the expenses linked to these later). CFDs can also be sold short. And this is something that is prohibited to do with other types of instruments.

Be sure to read the following article for beginners , where we will deal with the concept of short and long operations, trading platforms, the cost of operations and what it takes to succeed.