Trading with financial instruments by use of electronic platforms

 

Author: Daniela Naumova

In the past years, we have witnessed more and more increased internet trading with financial instruments at the stock exchange by use of relevant software applications. The history of internet trading is a fascinating and revolutionary story, which develops explosively along with the telecommunication technology development. The manner of working and functioning of the stock exchange, and of the financial markets, including the internet trading, is subject to legislative of a relevant country aimed to protect the investors and its participants. In the EU, the trading with the financial instruments is regulated by the European Securities and Market Authority (ESMA), which is an independent body of EU and contributes to the protection of stability of the financial system by enforcing the protection of investors and promotion of stable and regulated financial markets.

At the stock trading, where as participants historically we have large corporations, banks, institutions, there is an interesting fact that a new investment profile emerges lately: private/small investors, which purchase and sell shares of companies or trade with another financial instruments by use of electronic platforms. Thereby, we can number out as most attractive financial markets for trading to be FOREX, shares trading, trading with oil, noble metals, crypto currencies.

Why is internet trading for small investors is becoming more and more current and attractive lately?

Initially, it is of course the wish for a higher profit in a relatively short period of time, and one should not underestimate the other advantages offered by internet trading as are simple way of opening account and initiation of trading, accessibility to more financial instruments at one place, minimum deposit, access to several tools, information, and analysis.

In order to start with the financial instruments trading, it would be necessary to choose a company – platform, also known as by the role of on-line broker, which shall make the entry at the market and the options for purchasing and selling of instruments possible and available. Not less important is certainly the good knowledge of the terms, procedures, rules of trading and, a component which should not be neglected at all, is also the risk level that the investor is ready to undertake. Complementary to the above all, is perhaps one of the most important aspect which is the fact that the brokers offer “leverage”, that means borrowing of certain amount to the investor, constituent to the entire investment.

We are already going deeper into terms which might be specific for financial instruments trading at stock market, and for their consideration, followed by skills for implementation, high education and experience is needed. Therefore, very similar to the fact that the availability of certain texts on the internet cannot make the readers, who are experts in certain area, and as it is the case here, the availability of platforms, easy access, and possibility for certain activities, does not imply that the individual immediately becomes an experienced broker and knows exactly how to estimate the benefit and risks in order to reach a good decision for its investment.

Therefore, acknowledging the benefit of capital market availability to the wider public, in financial instruments trading, the investing has to be very careful: valuation of the ownership capital is not simple and the risk level undertaken by the investors is not always understood by all. It is hard to ignore the knowledge that the highly frequent trading during the day is less correlated with rational investments, but more with speculations. One of the types of a speculation, which was initiated in the last years, is share option trading.

In the case of share option trading, it is about a financial instrument which gives the title to the contract holder (the investor) for example to purchase (purchase option) certain share at certain price in pre-determined time in future. Given that the contract is giving title to the holder, but not also an obligation, to purchase the share, it has previously determined price. For example, for a compensation of 1EUR, you may get the title to purchase shares of a company, for example for 6 months, at pre-determined price, named as stroke price. After 6 months, if the share has higher value, you will purchase the share at the price of the previously signed contract. If the price is lower, you do not have an obligation to purchase the share and, thus, the paid-in premium is lost. Unlike this option, when you invest in direct purchase of shares, the investor has an investment which enables him to earn more, if the price is growing, or lose if the price is going down, but in any event, he owns the share. In case of share option, in a way it is more speculation/guessing than a real investment.

Speculative transactions and such nature of trading, force the regulators in some countries to initiate legal procedures against the companies which aggressively place their services without having the best interest for their clients in mind.

In some countries, the legislative imposes higher transparency to the companies which offer internet trading and they have to have information published at their web sites that it is a highly risky investment. For example, at the web site http://www.xtb.com/en, it is stated that 74% of the small investors lose their investment precisely because of the complexity of the financial instruments and insufficient understanding of these by the investors.

There from, the investors have to be prepared that they can suffer higher financial losses, the trading is not a hobby but requires dedication, education and, very often full working hours, regular follow up of available analysis of the financial markets, etc. If the rule “high risk, high income and vice versa” stands for in the world of finances, we may conclude that the higher profit is most frequently connected with higher risk, unlike the safe investments with a lower profit, which provide stable fertilization, as is for example the traditional bank saving.

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