Different Ways to Trade Your Money

Anyone who has ever looked at a financial chart or visited a trading forum has seen many ways to trade, as well as many different instruments to do so. Unfortunately most traders experience exaggerated claims about certain financial markets and prematurely commit to a market which may be incompatible with their capital or their risk-levels. From swinging for the stars with a sub-penny stock to waging your wages on a standard futures position worth +$80,000, this article will introduce you to the most popular instruments used by day traders in 2012.

News outlets like CNBC and Bloomberg cover them hourly. They are prominently featured in the business sections of newspapers, and are used to gauge the health of the economy. I am talking about the most popular financial market by far: the Stock Market. Everyone who trades in any financial market has dabbled in the Stock Market at one time or another, and for good reason too. In the Stock Market, the necessary knowledge needed to participate is minimal, the leverage is comparatively tame, and there are over eight thousand different stocks to choose from. When starting out, any amount of money is worth investing in the Stock Market, but for those interested in making a living trading stock, a minimum of $25,000 is generally seen as the minimum requirement without having your funds tied up in a clearing firm for half the time.

Fancy yourself a bit of a risk taker? Believe you can pick the next big company well before it reaches the radar of the public? Often, trading newbies enter with small savings and big dreams, leading them to the high risk and high reward world of Penny Stocks/Over The Counter Markets. In this market, $500 can get you potentially thousands of shares of a stock and returns can at times exceed 200 percent with a bit of luck and a lot of strategizing. Many people trade in the Over The Counter Market because they have a limited amount of cash so they believe this is the only way to make their money count. However, the OTC Market is an all-or-nothing, under-regulated arena notorious for leaving traders with nothing thanks to shady and downright illegal practices. The Securities and Exchange Commission has issued a statement to the public to this effect, warning that, “stocks that trade in the OTC Market are generally among the most risky and most susceptible to manipulation.” Those that do decide to trade in the OTC market need a strategy stronger than buying based on unsolicited tips received in their junk folder. If you don't have a lot of money and don't mind losing all of it when swinging for the fences, penny stocks might be right for you. As said before, an actual trading strategy is required to stay in the game long term.

Another often forgotten alternative for the financially-strapped and financially-backed alike, is the Options Market. The options are endless when it comes to Options trading. This financial instrument can offer returns that rival/exceed penny stocks without enduring the manipulation, cheating and constant newsletters to your inbox. Also, when compared to the OTC Markets, the systemic risk is nowhere near as high. Options allow for a variety of trade opportunities regardless of market condition or sentiment. Although risk is manageable, if Options are wielded recklessly, they can be the most expensive trading instrument in finance. Contracts can expire completely worthless after a predetermined period, increased leverage means potentially larger losses, and Options have perhaps the steepest learning curve of all the financial instruments. With that said, Option trading is an excellent trading tool for those who wish to trade for a living or those who just want supplemental income. It is one of the few instruments that allow for long-term speculation and short-term speculation without tying up large amounts of capital.

Exchange Traded Funds are an instrument that's popularity is growing yearly. ETFs allow traders to diversify their portfolio, essentially buying a basket of stock similar to a mutual fund. In fact, Forbes states that compared to mutual funds, ETFs offer “tax advantages” “greater flexibility” and expenses that are “considerably lower” when compared to the majority of Mutual Funds. ETFs are great instruments to use if you do not have a lot of cash available but want to take part in the Market, or if you are interested in a specific sector, country or industry. For example, buying the one share of the S&P 500 ETF, SPY is the equivalent of buying a fraction of each of the 500 different stock that are a part of the Standard and Poors 500 Index. When the average of the 500 stock increases, the value of your investment increases, and when the average goes down, the value of your investment decreases. ETFs are very simple, and thanks to the built in diversification of most ETFs, one of the more less risky ways to participate in the Markets. As said before, with ETFs, the focus is often on sectors

, countries

or industries

so if you fancy yourself an economy expert, or have a forecast about developing countries, this instrument would be an ideal way to put your money where your mind is.

The best way to describe the Futures and the Forex Markets would be walking into a casino and sitting down at a World Series Poker game in progress. Viewed by many as the ‘Stock Market on steroids', Futures and Forex markets are formidable because the stakes are always high, the majority of the players are professionals, and even the big fish from other financial Markets often end up shark food in this arena. Although neither Futures or Forex trading are as complicated as the Options Market, they are not merely highly leveraged versions of the Stock Market either. Contracts can expire, trades take place around the clock, these markets are much more sensitive to global events, etc. Fully understanding leverage is a must before trading Futures and Forex, because overall percentage moves that are small by Stock Market standards can easily result in hundreds of dollars profit/loss for the Futures/Forex Markets. Being overextended in these markets has lead to more trading accounts being frozen than having MF Global as your broker. After reading this article, you should have a bit more knowledge about the different types of financial instrument from a retail trader's perspective. There is definitely more to the discussion and we will go into detail in future articles. Feel free to comment below with any questions you may have or topics you would like to see discussed.