Fancy taking on more risk? Before you do weigh up the pros and cons of trading

Julie Brownlee, Fsp Invest, 23 May. 2014

Tags: trading, pros and cons of trading, risks of trading, trading products, advantages of trading, disadvantages of trading

Before you embark on any type of trading, you need to be fully aware of what you’re taking on BEFORE you begin. With trading, the risks are higher than investing in shares. And there’s the potential to lose a lot of money. So to help you make up your mind, you need to know the benefits and the drawbacks. Read on to find out more…

The benefits of trading

There are a number of different financial products available for you to trade. These include:
  • Single stock futures;
  • Contracts for difference (CFDs);
  • Spread trading;
  • Options; and
  • Warrants
All of these financial products work in a similar way and use gearing to multiply your profits (or losses).

Trading using these types of financial products have many advantages, including…
  • It’s cost effective to use these products. You only have to put down a deposit (margin) to trade a far larger number of the underlying asset (for example, shares).
  • You can use a stop loss to protect you from losing more money that you want. You can set this when you place your trade, and can move it afterwards if you choose.
  • You can make large profits in a short space of time.

The downside of trading

The biggest disadvantage when it comes to trading is getting it wrong. Before you begin trading it’s crucial you understand that this will happen regardless of how good a trader you are.

When you get things wrong with a trade, you can lose a lot more than you initially put down on a trade. And if you didn’t use a tight stop loss or your trade has been open for a while, you can mount up large losses.

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It’s the potential for these losses that makes trading so risky. That’s why when you decide to trade it’s absolutely vital that you use stop losses. They will protect you from large losses.

So there you have it, the pros and cons of trading to weigh up before you start trading.

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