We have talked about short sales several times in our first article, so now we are going to explain in greater depth the two ways of operating with a financial instrument.
The term “short selling” or “selling short” often confuses many without experience. Short sales allow operators to benefit from declines in the market value of an instrument. But how can we sell an asset that we do not own? Borrowing it
In the jargon of operators, when we want to buy an instrument, we are facing a “long operation”. Long operations are a concept that any new operator should familiarize themselves with. We have all heard the phrase “buy cheap to sell expensive.” That is exactly what we do. When buying or operating long with an instrument, we want it to be appreciated. Therefore, if we buy 1 share at 5 dollars and sell it at 6, we will have obtained a profit of 1 dollar. As simple as that.
The easiest way to explain it is with an example:
Suppose Apple’s securities are trading at $ 500 and we believe that the price of its shares is likely to fall in the future to $ 400 per share. We would like to benefit from that depreciation and we want to sell 1 share shortly to get $ 100 with the operation if the price falls to that level.
Suppose now that John owns an Apple share and has no problem keeping it because he is a long-term investor or believes that its value will increase. We contacted John and borrowed his action to return it in the future. You accept.
At that same time, we sell John’s stock at the current market price, that is, $ 500. Luckily, we have not been wrong, and the price of Apple shares falls the following week to $ 400 per title. Now we can buy back the Apple stock that we sold for $ 500 at the new price of 400. In this way, we give John back his stock and get a profit of $ 100.
You are probably thinking that this is a complicated process for those who are taking their first steps in the world of trading. But since we operate with CFDs and futures contracts, everything is greatly simplified. We don’t have to look for someone on the other side of the transaction (like John) to lend us their action. Our broker takes care of all that and all we have to do is press the SELL button if we believe that the instrument will depreciate and then press the BUY button if we believe it will be appreciated.
Since the emergence of the Internet, financial markets have become much more accessible for individual retail operators. Now we can use online brokers (such as AVA Trade) to open and close trades with financial instruments through their platform.
Brokers have evolved and now offer platforms for tablets and smartphone applications, allowing us to access our account at any time from any Internet connection.
Our trading platform shows in real time the prices of all the instruments with which we operate, its most relevant graphs with price fluctuations and offers the possibility of selling or buying with the press of a button. It is also possible to choose the size of the positions you want to buy or sell and set price levels so that our positions open and close automatically.
Most brokers allow you to open a demo trading account or practice before opening the real one. Demo accounts offer most of the functions and features of the real ones and, most importantly, the correct prices in real time. It is essential to familiarize yourself with the trading platform to feel comfortable when trading with a real account.
The cost of operating: the differential
The cost of placing an order with our broker is what is known as differential. This receives a differential for providing the services of its trading platform, software and market access. All instruments are quoted at two slightly different prices depending on whether they are being bought or sold. If we want to sell an instrument, we are offered a price, while if we want to buy it, we will be offered a slightly higher price.
This difference between the purchase price and the sale price is the differential. The differential is usually quite small, but its cost will depend on the volume of our position. Larger positions will involve a larger amount. We will take care of the differentials in more detail but, for the moment, all they need to know is that it is the cost of placing an order.
Due to the high level of leverage offered by the different financial instruments, we do not need high capital to start operating. Most brokers allow you to open a trading account with only 100 euros / dollars / pounds, although most operators start with a few thousand to cope with the volatility of certain markets.
Leverage basically means that our broker lends us money to operate with larger positions so that we only have to contribute a small part of the investment as collateral; It is what is known as required margin. Leverage allows us to open larger positions using a relatively small capital (or margin). This means that we can obtain much greater profits, but also suffer higher losses.
For example, with 100 dollars, we can buy 20,000 dollars of an instrument if they offer us a leverage of 200: 1. Each instrument has a different level of leverage based on market liquidity.
Leverage is an important concept in trading that we will deal with in more detail in a later article.
Where to start
To operate successfully, both part-time and full-time, it is important to invest the time and effort necessary to train us.
Keep reading our articles for beginners if you want to understand the basics, the videos will train you in some technical and fundamental concepts, and you can start practicing with your demo account.
Knowing how to read graphics is essential, as well as knowing the economic, social and political factors that make the instruments with which we are operating fluctuate well. These two elements are what is known as technical and fundamental analysis, and both are treated in much more depth in our beginner videos.
Let’s start learning and good luck with your operation!