A guide to trading tools

Which Trader’s Tools to use?

Shares, Options, Warrants, Futures and CFDs are all trading tools, but which is best? The right tool comes down to what you’re trying to do. Let's take a quick look at all the tools and when to use them.

If you’ve watched, read or listened to any of my other articles, you may have picked up that that the market has gone nowhere for about nine weeks now. This lack of conviction intertwines with stalling market leaders.

Normally the ‘changing of the guard’ occurs after a market fall and wash-out. With an uneventful change of the guard – this sideways churn – the old leaders are not completely given up by investors and the struggle for leadership is messy; meaning trading is fraught with danger.

Many investors perceive this as missed opportunities, however the likelihood of successful trades goes out the window during such a stage. In turn, at times like this, our trade recommendations are lower in numbers.

When the tables do turn, it becomes a case of ‘when rains, it pours’.

Here are the tools to look at in the meantime:

Shares

• Require the most amount of capital

• Provide direct exposure to what the share price does

• Is forgiving if your timing is off. This alone is the reason why most investors lose money in the share market. If misused, this attribute is more of a curse than a blessing

CFDs

• Require minimal capital, normally a fraction of what each share costs

• Reflect a direct exposure to what the share prices does

• Can be cruel and unforgiving if used without strong trading rules

Options and Futures

• Require minimal capital

• Can provide an array of share price movements depending on how the options/futures are selected and traded

• Can be cruel and unforgiving if used without strong trading rules

• Can provide unpleasant surprises for inexperienced traders. In the past I have provided a 9-week training course for new Options investors and prefer clients to dip their toe in the water for the first three months before scaling up investments

Warrants

• Require moderate capital

• Can provide an array of share price movements depending on how the Options are selected and traded

• Provide a great tool for dividend trades

• Can provide unpleasant surprises for inexperienced traders

The above is a sharp summary, not advice.

All investors should understand the products, read the PDS or terms and consider their personal circumstances before trading and investing.

Another article that may be of interest is the Rules of Investing, found here.