One thing up front. While a few years or decades ago the stock market was still relatively inaccessible to most private individuals, this has definitely changed over time. In a world of "seemingly" unlimited possibilities, more and more people discovered the possibility and especially the chance to participate in the stock market. You have certainly played with the idea of making your money work for you? There are incredibly many possibilities to act on the stock exchange. Our focus in this article is on trading.
But what does it really mean?
Many people associate the stock market and trading directly with speculation, risky investments and the danger of high losses. In this article, we want to bring some light into the darkness and clear up the whole topic around trading. What is really behind the possible danger? What opportunities does the whole thing bring with it and why should you even necessarily become active in these areas in this day and age?
Basic terminology:
At the beginning, we want to clarify so that there is a big difference between the following three terms. "Speculation", "Trading" & "Investment" - Usually most people who are not familiar with the topics use these terms synonymously. So they are not really aware that there are big differences here. When speculating, the hope for the desired scenario usually prevails. There is usually a great deal of risk involved and the procedure cannot be repeated systematically. Speculation often resembles emotional trading. When investing, one tries to generate returns through long-term capital commitment. Active trading is extremely reduced here, since these investments have a very long investment horizon as a basis. So you either get in or you don't. Now let's move on to trading.
In trading we try to take profit differences between buy & sell price by active and reproducible trading. This means that we trade based on recurring patterns with constant parameters. To a certain extent, this form can also be called speculative. However, profitable strategies are based on a positive long-term probability forecast. Thus, we do not act purely speculatively and hope for an event, but we analytically evaluate events and react to them. This approach also allows us to calculate the average expected value at any point in time.
Overall, we thus have three options in trading:
-> Long
-> Short
-> Flat
Long means will profit on rising markets. If we have bought a position accordingly, we will profit from rising prices. If the price falls, we lose. This process is often referred to as a call. Short means trading when we profit from falling prices. If we have bought a short position, we make profits if the price continues to fall. If the price rises, we lose. This process is also called a put.
The third option is the so-called flat. This means that we do not own any position or have closed all positions. We wait accordingly for new entries. If opportunities arise again according to the strategy, positions are built up again.
So what's behind the rumors - "rip-off or goldmine"?
The beauty of trading is the fact that we can profit from both rising and falling prices. So if you manage your own risk sensibly, there is much more of a goldmine behind it than a rip-off. Nevertheless, the fact remains that over 75% of private investors are less successful. However, common reasons for this figure are usually lack of knowledge, lack of seriousness and unrealistic expectations. "Too fast - too much" will very often backfire in this case. It takes time, knowledge & experience to become successful in this area.
In our next article on the topic of "Trading - how you too can profit from it", we will explain in more detail what else is involved and what you should definitely pay attention to. In addition, you can find more information under Financial Fitness.