Academy News How to trade on exchange

How to trade on the exchange market

Stock trading attracts more and more people, for several reasons. Probably the most common of these is the vision of enrichment, suggested by Hollywood blockbusters like Wolf from Wall Street. After all, who wouldn't like to ride expensive cars, be the master of their own time and watch the growth of their bank account balance? But the reality is often diametrically different, and while trading on the stock exchange can of course make you rich, it takes a lot of effort and a desire to learn new things. If you are determined to roll up your sleeves and embark on a trader's career, this article can serve as a stepping stone.

What types of exchanges exist

Right from the start, we should make it clear that there are several types of exchanges (money, commodity, service exchanges, etc.). We will focus on money-type exchanges, which are divided into two other types. The first of these is the stock exchange, which you know from the aforementioned Hollywood blockbusters, where a gang of yuppies are shouting over each other in a crowded hall full of monitors. The second is the futures exchange. Although it does not catch the attention of filmmakers so often, it can be paradoxically more interesting for an ordinary person.

Stock exchange

In order to trade on a stock exchange, one needs more capital (at least hundreds of thousands of crowns). For one simple reason, although the shares of some companies can be cheap, if you want to receive interesting amounts in dividends from them, you will have to invest a lot and dig deep into your pocket. This is one of the reasons why stock trading is often the prerogative of wealthier individuals who can afford to risk larger amounts. Because risk is an integral part of any trading. The minimum amount for trading on the stock exchange is tens of thousands of Euro. In the case of trading on the futures exchange around thousands of Euros. For Forex, it is somewhere around 100-1000 EUR.

Futures Exchange

Futures belong to a group of products called financial derivatives. The main difference in trading in financial derivatives is the fact that the trader does not own any of the traded assets, but only speculates on the movement of its price. You don't have to dig a pool in the garden to store 1000 barrels of oil, but you still have the opportunity to make money on it. In Purple Trading, clients can choose from a variety of futures instruments such as coffee, cocoa, oil, and others - see our full offer of futures instruments. Or read an article about futures trading specifications if this is your first time hearing about this type of instrument.

Futures trading interaction takes place in the sense that on the one hand there is a buyer who wants to acquire a certain asset (for example, the already mentioned oil), but does not want it now, but in the future (therefore futures). The other side is logically formed by the role of the seller, who comes up with a demanded offer, which is a futures oil contract.

However, someone must "sanctify" this contract and give it clear rules that will be followed. That is why the stock exchange is entering the scene at this moment. It ensures the so-called standardization of business contracts (their volume, quality and due date) and gives the overall business relationship a seal of transparency and security. Despite all these advantages, however, futures contracts may still not be available to everyone, because the initial capital for trading on this market is somewhere around 3000 €. However, in Purple Trading, you can open a trading account with an initial deposit of 100 €. That’s because we offer futures in the form of CFD contracts for which financial leverage can be utilized, enabling you to operate with trading positions of a bigger volume than your initial deposit.

Decentralized market - when you don't have deep pockets

If you wanted to trade on the stock market, but only now have found that it is beyond your financial capabilities, no need to feel down because it is possible to trade with smaller capital. However, as the name suggests, this is not stock exchange trading, but rather trading on a decentralized interbank market, where your orders are processed directly by the broker with which you trade, these are usually called Forex brokers.

What is being traded here

The above-mentioned futures contracts are not the only financial derivative that can be traded. Much more frequent and more popular with the public are the so-called CFD products (contract for difference). Unlike futures, however, in this case the trader does not enter into a contract with the stock exchange, but only with his broker.

The most common CFD products include:

Forex (speculation on price developments between currency pairs)
Commodities (gold, silver, oil, etc.)
Stock indices (DAX, NASDAQ, S&P 500, etc.)
Stocks
Futures
Cryptocurrencies

We would like to mention that since these are derivatives, the trader doesn’t become a owner of any of the traded actives but rather a price speculator.

Educational insight: How does stock trading work in the 21st Century?

Trading on any type of exchange works very different today from how it is portrayed in famous Hollywood blockbusters like The Wolf of Wall Street. This is because it all happens on a computer screen and so there is no need to crowd a room full of shouting traders.

So to trade on the financial market, you need a computer (or a smartphone) onto which you download a so-called trading platform. This is a program that shows you actual charts of the market instruments you are trading. Through the trading platform, you place your trading orders, which are then sent to the market, where they are then matched with the counterparty. However, to get your orders into the market, you need to open an account with a brokerage firm. The broker serves as a kind of intermediary that is directly connected to the market to which it sends your orders.

So your orders first go to the broker's servers, who then send them to the market where they are paired with the counterparty. Any profits then go directly to you, while losses stay in the market or go to the broker (depending on the broker model, which is something we describe below in this article).

Trading platforms - software necessary for trading on the stock exchange

It doesn't matter if you decide to trade gold using CFDs or enter the exchange with futures contracts, you will need a trading platform in all cases. This software serves as your gateway to the world of the markets and shows you, through different types of charts, how the price of the instrument you are trading is doing. The platforms run on your computer and some of them also work on smartphones or in your web browser interface.

There are plenty of trading platforms and some brokers even offer their own platforms, but one of the biggest stalwarts of online trading is the MetaTrader 4 platform. In addition to charting, trading platforms also offer the ability to use various trading tools designed to help you spot potentially profitable opportunities in the market. The most common types of tools include indicators.

At Purple Trading, we offer clients the modern cTrader trading platform in addition to the legendary MetaTrader 4. The cTrader is developed by the traders themselves and designed to make trading on it as intuitive as possible, giving the trader the ability to manage risks more precisely.

Main benefits of CFD trading

Possible to trade with small capital

While for trading on the stock exchange you need capital in the order of tens of thousands to hundreds of thousands, for trading on Forex (and other CFD products) the amount of initial capital for opening an account is in the order of thousands (for Purple Trading it is 100 €).
High diversity of tradable assets

In addition to a large number of currency pairs, Forex brokers also offer stock indices, commodities (gold, silver, oil) and cryptocurrencies. The trader does not have to focus on only one market but can diversify his portfolio exactly according to his ideas.
Possibility to speculate on both price increase and decrease

Unlike stockholders, a CFD trader does not have to worry about falling asset prices. Sometimes it’s quite the opposite. If you are sure that the market is in a bad shape and will continue to be for some time which means that prices will fall, you have the opportunity to simply speculate on its decline and make money on it.

Financial leverage trading

Leverage determines the ratio of the amount of capital you invest in a given trade to the funds provided to you by the broker. Basically, this means that the broker will provide a certain amount for each trade, which you will then be able to use only in trading. This will allow you to operate at a larger volume than with your own account balance.

Within EU regulated brokerage firms, this leverage is usually 1:30. In practice, this means that if you invest EUR 1,000, you will have EUR 30,000 available to invest. It sounds really tempting, but you need to realize that leverage can lead to both higher profits and higher losses. This is especially true for novice traders.

What is the role of a broker

It is much more convenient to use the services of brokerage companies to enter the stock exchange, in some cases, it is even the only possible way to enter the market (eg Forex). In order for a broker to represent you, different types of licenses must be valid on his side. Brokers then play the role of an intermediary between you (the trader) and the market to which you send your trading orders. How the broker "treats" your request and what happens to it is also determined by the model on which the broker operates.

The basic types of Forex brokers are the following:

Broker based on the STP model

It really acts as an intermediary between the trader and the market in which his order is matched with the counterparty. Brokers of this type will take your order and try to find the best counterpart for it, which results in a higher price on the so-called spreads (the difference between the demanded and offered price), which the trader must pay. However, you can be sure that the broker does not manipulate your order in any way because he is simply not able to do so (he cannot determine to which interested party he will "sell" it).

Market Maker

Unlike STP, it has the ability to match traders' orders directly with each other and thus play the role of a counterparty. This often means lower overall spread prices and also faster order processing, but there are known cases where MM brokers manipulated prices or artificially reduced the speed of execution. You can read more about the differences in the functioning of STP and MM brokers here.

How to choose a suitable broker

When choosing a broker, you should take into account, in particular, spread prices, the speed of executions (so-called latency), and also, for example, whether the broker is located somewhere in the EU and, therefore, is regulated. It should also be borne in mind that financial services such as Forex (currency pair price speculation) are far less regulated in non-EU countries. Which can be water on the mill for fraudulent brokers.

Therefore, if you want to start trading and get your hands on the conditions that the broker offers you, we recommend that you open a demo account and try trading with virtual money. For example, you can open a Purple Trading demo account HERE.

How to start trading

As mentioned above, the first step should be to set up a free demo account and trade with virtual money, which can be replenished free of charge upon request. At the same time, however, the person interested in trading should actively educate himself. There is a wealth of free publications, videos, reviews, and tutorials on the Internet that cover the basics of trading and more advanced methods.

As a beginner trader, you have several educational options

Creating a free demo account - trading on the real market, but with virtual money, which you can replenish upon request. A great choice for all beginner traders.

You can open a demo account for free HERE, for example.

Ebooks - The internet is full of ebooks that offer basic information about trading in the financial markets. Luckily, you don’t need to go far to find a good informative ebook for free. Because at Purple Trading we offer quite a few of them! Learn how to trade Forex, how to trade gold, or what is the best approach to start trading stock indices.

Educational articles and videos - The education of clients and their ability to trade profitably should be a top priority for brokerage firms. And for one simple reason - such a client will last longer with trading. Therefore, on the websites of most brokers, you will also find educational sections full of articles, graphics, and videos. See our own educational section

What financial products Forex brokers offer

If you want to actively participate on trading

In addition to speculation on a decline or increase in prices between certain currency pairs, it is also possible to speculate on the development of prices for CFD products, so-called stock indices (NASDAQ, DAX, etc.), precious metals (gold, silver) or oil. These financial products are among the most attractive, but they carry a higher degree of risk. Therefore, it is generally recommended to try to trade on demo accounts first and gradually work on your proper trading education.

The environment of financial markets is very competitive and that is why brokers compete in offering the most attractive financial products.

In case you are not willing to trade on your own - become an investor

Not everyone has the ambition to become a trader. But what to do if you want to invest but do not have the means to trade on a stock exchange market? The financial market environment is very competitive, which is why brokers compete to find a better answer to this question.

Today you can choose from these passive investment options:

ETF portfolios - this is a set of shares or bonds in which it is possible to invest. It is usually a passive, long-term investment with varying degrees of profitability and risk. (With brokers such as Purple Trading, you can also start investing from 20 EUR.)
Forex Strategies - Many professional traders offer their strategies to investors. In this case, the broker serves as a link. The client thus registers with a broker, who connects him with the strategy of a professional trader, for which he charges a certain fee. The professional then trades in the client's / investor's money.
CopyTrading - a method similar to Forex strategies, but with the difference that clients can connect with each other. So the point is to find the most successful trader / client and join his strategy.

How to trade on the exchange market