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)
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
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