What can we trade in the Financial Market and How does it Work?

What can we trade? How does it work?

In the Financial Market, lots of instuments can be traded. Some of the instruments are

Trading Instruments	Trading	BUY/SELL	Securities	Price	Trade Measure
Stock	Company	Number	Apple Tesco Honda BMW	$ £ ¥ €	Points/Tick
Indices	Index	Number Index	FTSE100 Dow30 S&P500 DAX NIKKIE225	£ $ $ € ¥	Points/Tick
Forex	Currency pair	lot	EURUSD GBPUSD AUDNZD GBPJPY CADCHF	Standard lot Micro lot Mini lot Nano lot	Pip/Point
Commodities	Valuable things	Weight	Gold Silver Copper Oil Wheat	Ounce Ounce Ounce Barrel Brussel	Point/tick

Trade Stock

1 Share of apple cost =$192.40 as it is US Stock

1 Share of Tesco cost = 249.20 Pence (GBP) as it is UK Stock

1 share of Honda cost = ¥3598.40

1 share of BMW cost = EUR 83.74

Trade Index

1 FTSE100 index cost=£7730.60

1 Dow30 index cost= $25322.50

1 DAX index cost = €12878.97

1 NikKie225 = ¥22929.00

Trade Forex

1 Standard lot = 100,000.00 Units

1 Micro lot = 10,000.00 Units

1 Mini lot = 1,000.00 Units

1 Nano lot = 100.00 Units

Trade Commodities

1 Contract of Gold controls 100 troy ounces or one brick of gold and 

1 mini contract controls 32.15 troy ounces

1 troy Ounce Gold = $1284.50

1 contract of Silver control 5000 troy ounces and 

1 mini contract controls 1000 troy ounces

1 troy Ounce Silver = $16.295

Oil

1 contract size is 1000 barrels

1 barrel Crude oil = $64.64

Wheat

1 contract size is 500 Bushels

$22.20/bushel

If you want to buy any shares of company, first of all you need to know where is the company listing. If it is listing in NASDAQ (Apple) then you have pay in USDollar. If it is Lising in FTSE100 (Tesco) then you have pay in GBP. Similary Honda and BMW in Yen and Euro respectively as they are listed in NIKKIE225 and DAX30.

Regarding Indices, if you want to buy1 index Dow30 then you have to pay US$25322.20. Similarly for 1 index FTSE100, you have to pay £7730.60

Curriences and Commodities are priced in US dollar.

Financial Market Overview

Financial Market

Financial Market is a place where trading financial instruments or securities and derivatives including equities, bond, currencies, future, option and contract for difference.

Financial Instruments

• 1.      Bond- Gilt in UK, Bund in Germany and T-note in US
• 2.       Stocks- Companies Shares
• 3.       Indices- FTSE100, FTSE250, AIM, NASDAQ, S&P500, Dow30, DAX
• 4.       Currency – Forex (foreign exchange)
• 5.       Future- derivatives (derived from underlying assets)
• 6.       Option- derivatives (derived from underlying assets)
• 7.       Commodities- Gold, Silver, Crude Oil, Wheat etc

Leverage

Leverage is an investment strategy of using borrowed money. Leverage, sometimes, refers to as gearing, is a technique involving the use of borrowed funds in the purchase of an assets.

Example of Leverage:

Let’s suppose, House price is £200,000.00

Make a down payment = £40,000.00

Mortgage = £160,000.00.

Now, because of leverage of £160,000.00 can access worth of £200,000.00 just using £40,000.00.  This is a typical example of using leverage.

Margin

Margin is the difference between the total value of Securities held in a trader’s account and the loan amount from the broker.

Buying on Margin is the act of borrowing money to buy securities.

Leverage	Capital Invested/Margin	Purchase Power	Margin Ratio
1:1	£1,000.00	£1,000.00	100%
1:10	£1,000.00	£10,000.00	10%
1:50	£1,000.00	£50,000.00	2%
1:100	£1,000.00	£100,000.00	1%
1:400	£1,000.00	£400,000.00	0.25%

 

Position Sizing

Position sizing is the “how much” part of the equation when you trade.

In order to find out the position size of any financial assets to trade, following steps

• 1.       Account Size= £10,000.00
• 2.       Account Risk= say 1% then £100
• 3.       Trade Risk (Stop Loss)

Example Tesco 
Current Share price = 250 Pence
Stop Loss = 200 Pence
Trade Risk = 250 Pence – 200 Pence = 50 Pence or £0.50

• 4.       Proper Position size =£100/£0.50= 200 Shares

It shows that we can buy 200 shares of Tesco, by risking 1% of Account using stop loss at risk of 50 Pence each share.