Investor Competition 2018: trading basics
Want to become rich and privileged like the Wolf of Wall Street? If you don't try, you’ll never succeed, but you need to be more than just audacious! A good start is to get an understanding of these basic terms of trading.
A share is a certificate of ownership. If you buy a share in a company on the stock market, you will become together with all other shareholders a part-owner of the company. You’ll be entitled to any dividend paid out and, what's more, you can vote at the general meeting. This gives you a say in how the company is run.
Exchange Traded Funds (ETF), or trackers, are listed financial products that let you follow the evolution of an underlying security. This might be a stock market index, but also something like a commodity or a currency. There are also trackers and ETFs that pursue a decrease in the underlying security (short) and/or benefit from leverage.
Maximum 10% of the portfolio in the Investor Competition
A Turbo is a leveraged product whereby you anticipate a possible increase (call/long) or decrease (put/short) of an underlying security. You invest only in part of the value of the underlying assets, while the issuer of the Turbo finances the rest. Turbos may or may not have an expiry date. They always have a stop-loss level: once this level is reached, the Turbo ends automatically.
Maximum of 5% of the portfolio in the Investor Competition
Stock Market Order at market value
This is the simplest stock market order for buying or selling assets at the going market price, i.e. without any price restriction. So your order will very likely be executed, but you don't know at what price and this can be dangerous with shares with limited liquidity.
This is an order for buying or selling securities, but not at any price. At the time of purchase, the order will not be executed if the price is higher than a certain limit. At the time of sale, the order will not be executed if the price is lower than the limit price. This gives you greater grip on the price of the transaction, but you do not know for sure whether the order will be executed.
An option gives you the right to purchase (call) or sell (put) an underlying security at a certain price (the exercise price), provided that you pay a premium. You can buy and sell this derivative, thus creating numerous investment strategies.
A bond is a debt investment. If you buy a bond on the stock market, you will become together with all other bondholders a creditor of the issuer. Among other things, this entitles you periodically to interest until the bond’s maturity date, if you recover the face value normally.
A fund (or ‘Bevek’ in Belgium) is an investment portfolio that a financial institution manages according to a certain strategy. By purchasing a share in this portfolio, you obtain from your very first euro access to a diversified portfolio and can benefit from the professional expertise of the institution, which will limit your risks.
Just like an option, a warrant gives you the right to sell (call) or buy (put) an underlying security at a certain price (the exercise price), provided that you pay a premium. But you can’t sell a warrant. Its price depends on the underlying assets, and also on the time remaining until maturity date and volatility.
Like a Turbo, a Contract for Difference (CFD) is a financial product with leveraging, thus enabling you to respond to the price of the underlying security when it rises (going long) or falls (going short). There is no stop-loss level for a CFD, but the risk attached to it can be greater compared with a Turbo. As CFDs are not listed on the stock exchange, you will need to enlist the services of specialised platforms that operate 24 hours a day.
A future is a commitment between two parties to buy or sell a certain quantity of an underlying asset at a certain time in the future. Worldwide, it is the oldest and most traded kind of contract.
Forex (an abbreviation of ‘foreign exchange’), or FX, is trading in foreign currencies that determines the value of one currency relative to other currencies. After the interest rates market, this is the world’s biggest financial market.