Online trading, how does it work?

Despite the risk inherent in the financial markets, it has never been so easy to invest in them as an individual. Therefore, precautions are necessary.

Online trading imposes a very important part of technique.
Online trading requires a very important part of technique.
© shapecharge / E+ / Getty Images

I subscribe to 1€ the 1st month

The world of market finance is intriguing. It even fascinates sometimes. Who hasn’t already imagined themselves as Leonardo di Caprio in The wolf of Wall Street or in Michael Douglas in Wall Street ?

Today, finance has nothing comparable to that era. Once reserved for industry professionals, the world of equities, quotes and other leveraged derivatives is now at your fingertips. Everyone (or almost) is invited to embark on the adventure of online trading. However, this universe remains extremely risky and is aimed at a very specific type of profile.

The basic base

Online trading requires a very important part of technique. It is illusory to think of taking out a subscription to trade online, in the hope of doubling or tripling one’s earnings, without a thorough mastery of market mechanisms. How does trading work? Who intervenes? What is an order? What are the pros and cons of leverage? All these basic questions must be mastered at your fingertips before starting.

For this, many training courses (free or paid) are available online or in stores and will allow individual investors to start their online trading experience under the best possible auspices.

The choice of broker

Before getting to the heart of the matter, the budding trader must first make his choice on an online broker. Quite a pair of sleeves given the proliferation of brokers of all kinds on the web, including those who are not authorized to offer their service on French territory. As such, the Autorité des marchés financiers (AMF) maintains several blacklists of brokers who have been the subject of a warning or who have usurped the identity of an authorized actor. Essential, unless you turn to more recognized brokers, including Bourse Direct, Binck, IG, Degiro or Admiral Markets.

Therefore, the individual investor will have to arbitrate according to his desires, his strategy and the products offered by the broker. Warrant, CFD, turbos, options, futures, ETFs (or trackers) etc? Each product has its mode of operation, its specificities and its risks. Most are derivatives, ie they reproduce the price behavior of an underlying.

The double edge of leverage

The problem with leveraged derivatives…is precisely the leverage! The principle is simple: it allows the individual investor to hold a position on a financial market by tying up only a fraction of the necessary capital. For example, with a leverage of 10, you only need to pay 2,800 euros to open a position representing an actual exposure of 100 shares at 280 euros, or 28,000 euros.

In this way, if the shares rise by 10%, the potential gain amounts to 2,800 euros, or a return of 100%! Conversely in the event of a fall in the shares. The leverage effect therefore makes it possible to multiply the gains but also the losses. And a good number of private investors do not understand this concept well, which sometimes creates very delicate situations. Especially since some brokers can offer leverage effects of up to 400!

The double edge of leverage

The AMF also calls for the greatest vigilance of individual investors regarding the risks of leveraged products. In 2014, it published the results of a study according to which 89% of clients using the services of CFD and Forex trading brokers are losers. This study required 4 years of observation on a panel of 14,799 private investors and also establishes that each user of this type of service loses an average of 10,887 euros.

Thus, in order to protect savers against the dangers of the riskiest speculative instruments, the AMF prohibited, on 1er August 2018, the marketing of certain CFDs, by controlling the leverage effect according to the nature of the underlying. It is now limited to 30 for CFDs on the most important Forex currencies, 5 for CFDs on stocks and 2 for CFDs on cryptocurrencies.

Leave a Comment