Have you decided that you’d like to start making your move in the world of high risk, high reward investing? In the past, choices were slim when it comes to this type of investing. However, these days there are several exciting options for those looking to move in this direction. More importantly, these days you don’t have to be a Gordon Gekko type Wall Street professional to make a decent amount of money in the industry. Today, we’re going to discuss some of the most popular high risk, high reward investment vehicles, offer pros and cons, and point you in the direction of the industry leader for each investment type. So, let’s get right to it!
One very common high risk, high reward investment vehicle is called a CFD or Contract for Difference. In essence, CFD traders don’t buy stocks. Instead, they purchase contracts with much more leverage based on underlying assets.
CFD Trading Example
Let’s say a stock is trading for $50 per share. To buy 100 shares, you would have to pay $5,000. With a standard broker, you would have to outlay at least 50% or $2,500. However, with a CFD broker, you need a 5% margin instead of 50%. Therefore, you would only have to $250 to make the trade.
When the CFD is purchased at $250, the trader will immediately show a loss equal to the spread. That’s because the trader must exit the CFD at the bid price. So, if the spread is $0.05, the stock will need to appreciate $0.05 for the CFD to reach a break-even point.
Let’s say for example that the stock bid price appreciated to $51 per share. In this case, the trader would be able to sell the CFD at the higher bid price, profiting $100.
CFD Trading Pros
- Higher leverage than traditional stock trades.
- Global market access from one platform.
- Few rules and regulations that limit profitability.
CFD Trading Cons
- Paying a spread to enter and exit a trade can get expensive.
- Having to pay the spread can increase losses and limit profits.
- Few regulations in the industry means you will need to choose your broker wisely.
Top CFD Broker
TradeKing.com is known as the leader in CFD trading.
Binary Options Trading
Binary option trading is becoming more and more popular over recent years. This trading vehicle asks a simple “yes” or “no” question; will the value of an underlying asset increase over a specified period of time. If the trader answers the question correctly, they stand to earn incredibly high gains. If the trader answers incorrectly, they will lose their capital. That’s why this form of trading is called binary options trading; there are only 2 possible outcomes.
Binary Options Trading Example
Let’s say that stock A is trading at $100 per share. You’ve done your research and strongly believe that the stock will increase in value over a short period of time. So, you purchase a call option that will expire at 1:30pm with a strike price of $102 per share. If the stock expires above the strike price, you’re in the money and you earn the specified dollar amount in gains. Generally, these gains range between 70% and 80% of the trade value. Therefore, profit on this trade would generally range between $70 and $80. Also, keep in mind that if you believe strongly that a stock or other asset will fall in value you should purchase a put option. I like to remember which is which by remembering the terms “Call them up” and “Put that down”.
Binary Options Trading Pros
- High potential for profit.
- Fast paced environment makes trading more exciting.
- Access markets around the world from one platform.
- One of the simplest forms of trading.
Binary Options Trading Cons
- High loss potential; so, do your research!
- Few regulations in the industry; so, choose your broker wisely.
Top Binary Options Broker
Anyoption.com is known as the leader in the binary options industry.
For those interested in economic climates, industrial and employment reports, and economic research, Forex may be the investment vehicle for you. Forex trading is done by following currencies and making predictions on currency pairs.
Forex Trading Example
Let’s say that you’re working with a broker that gives you 1:20 leverage and you have $5,000 to trade. That means that with your leverage, you can trade up to $100,000. Let’s say you’re interested in the Euro, which paired against the USD has an exchange rate of 1.305. You think the Euro is going to increase in value, so you sell your $100,000 for 76,628 Euros.
Now, let’s say you were right and the Euro increases by 1%. Because of leverage, you’ve no earned a 20% gain. You decide to sell your Euros for $101,000; resulting in a net profit of $1,000 to you.
Forex Trading Pros
- High leverage means high potential gains.
- Because currencies never stop moving, you have the ability to trade around the clock!
- Forex generally comes with lower fees than other types of investments.
Forex Trading Cons
- Currency traders are literally trading against the pros, creating a bit of a conflict of interest.
- Requires an in depth, detailed understanding of how economies work; leaving quite a bit of room for newbies to fail.
Top Forex Broker
Plus500.com is considered to be one of the top Forex brokers around today.
ETF (Exchange Traded Fund) trading is the process of trading based on indices like the Dow Jones Industrial average or the S&P 500 rather than a particular stock. However, the trades work almost exactly like traditional stock trades. Simply put, with ETFs you get the diversification of an index fund and the flexibility of a stock.
ETF Trading Example
You strongly believe that Index A is going increase. So, you purchase an ETF that’s based on the underlying Index A. After a few days, you realize that your assumptions were correct and the index is on an uptrend. At the end of the trend, you sell the ETF for a great profit.
ETF Trading Pros
- ETFs give you the ability to invest in the performance of an index without having to purchase index funds.
- ETFs are incredibly flexible.
- Diversification is all but automatic.
ETF Trading Cons
- Investing in ETFs typically requires a broker fee.
- Because ETFs are relatively new, there are fewer options for traders.
Top ETF Broker
Thinkorswim.com from TDAmeritrade is considered to be among the top ETF brokers.
One of the reasons investing is becoming more and more fun is that there are so many new investment vehicles out there today. If you’re looking to try your hand in the world of high risk, high reward trading, you’ve got more options today than ever before!