Trading can enable you to implement alternative strategies to create wealth. Different strategies and tools such as short-selling and derivatives (e.g. CFDs) can be used by traders to take advantage of different market conditions and make use of increased market exposure.

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A trader or investor may also implement the following ideas to enhance return, protect value or manage collateral.

Margin Trading and Portfolio Diversification

While borrowing for an investment property is a well-accepted way to grow wealth, borrowing for share purchases is less widely understood, but the benefits are numerous. Margin loans or protected equity loans are one way for investors to borrow for share investing. This type of loan allows you to borrow the total value of a share parcel’s purchase price. There are also significant risks associated with margin loans and protected equity loans.

CFDs are a more cost-effective alternative to margin loans or protected equity loans where investors can use leverage to gain exposure to a diversified number of positions without having to fund a physical holding. There are obviously significant risks associated with the use of leverage.

Hedging

Many investors find CFDs an ideal tool to protect the value of their physical share holdings. For instance, an investor can hedge an exposure in a particular share being held long term for a dividend stream against an anticipated fall in price by taking a short CFD position.

Financial Management

Share CFDs can be sold to lock in a profit on a shareholding without incurring a tax liability. CFDs can also be used to release cash from your existing share portfolio or alternatively the equity in your shareholdings can be used as collateral to open CFD positions.

Pairs Trading

A pair trading strategy involves trading correlated shares where you simultaneously buy one share while shorting the other share. You are taking a market neutral position where you only concerned with the difference of a price move between the correlated shares not with the overall direction of the market. You are attempting to profit from the view that the bought share will outperform the sold share on the belief that convergence or divergence will occur.

Day Trading

Day trading is the practice of buying and selling stocks during the same trading day. Ideally at the end of the day there has been no net change in your position. The gain or loss is made on the difference between the purchase and sales price. An effect of this style of trading, is that the shares are never delivered or received.

Day trading is more risky than any other trading activity. It is very common to use margin with day trading (i.e. using borrowed funds) amplifying gains and also amplifying losses. The downside is that substantial losses can occur very quickly. A common belief is that 80%-90% of day traders lose money (source: http://en.wikipedia.org).

Day trading was once the domain of financial firms and professionals along with experienced traders and speculators. However, with the advent of the internet, electronic ordering and discount brokers it is now common amongst small retail traders.

Day trading is officially called "pattern day trading" and means placing four or more buy and sell orders in one day on a regular basis.

Day traders trade various financial instruments including: shares, options, warrants, foreign exchange and a host of futures contracts.

There are a number of strategies by which day traders attempt to make a profit:

Trend following, a day trading strategy used in all trading time frames, assumes that prices that have been rising steadily will continue to rise, and the same for falling prices. The trend follower buys a share which has been rising or short-sells a falling share, in the expectation that the trend will continue.

Fundamental analysis is one of the biggest tools of the day trader. The basic strategy is to buy a share which has just announced good news, or short-sell a share on bad news.

Technical day trading uses mathematical formulae to decide when a share is going to rise or fall based on previous price action. Many day traders use technical indicators.

You should be aware of the following dangers of day trading:

1. Many day traders trade without a plan of any kind as to what to buy and sell and when.
2. In many cases a day is simply not long enough to realise the profit of a share.
3. Day trading can be very emotional and based on gut-instinct.
4. Much of the fundamental analysis data day traders use is quite delayed and this will mean that by the time it is received and acted on, the rest of the market, especially the stock broking industry, has already taken action.
5. Day trading can mean profits are too low to cover fixed costs, such as brokerage.
6. Day traders often use leverage which can amplify losses as much as it can amplify gains. For the inexperienced this can lead to the risk of losing more than you have in your float.

If you would like to investigate an alternative to day trading register here for HomeTrader’s FREE Intro Seminar.