Equities, Options or futures?

[SRosen]

As a beginner, how do I decide whether to trade equities, options, futures or forex?

 

[Rhody Trader]

It comes down to capitalization and comfort. Stocks and forex don't have any functional lower end in terms of how much you need to trade - and effectively neither do options, but there are other considerations. Futures have minimums based on required margin. If you have a good capital base, then it comes down to picking the market you feel most comfortable with. There really isn't one best market - just best for you.

 

[SRosen]

Thanks for your prompt reply. You mention that with Stocks and forex there are 'other considerations' What are the ‘other considerations’ when considering stocks and forex?

 

[timsk]

Hi SRosen,
Welcome to T2W.
Once you've read the first two FAQs linked in my signature, you might find this one is also of interest: What Should I Trade?
Enjoy!
Tim.

 

[Rhody Trader]

Thanks for your prompt reply. You mention that with Stocks and forex there are 'other considerations' What are the ‘other considerations’ when considering stocks and forex?

The other considerations were in terms of options, not stocks/forex.

 

[SRosen]

The other considerations were in terms of options, not stocks/forex.

Gotcha - what are the other considerations in terms of options?

 

[predator001]

Hi SRosen,

options and futures are derivative instruments so can have different underlying instruments (including equities, commodities, forex etc), so they are not necessarily mutually exclusive from equities and forex.

However, for the sake of simplicity, I shall presume that you are referring to EQUITY options and futures (i.e. options and futures with the underlying being an equity instrument). Derivative instruments (as you are probably aware), instruments whose price is derived from that of another instrument. They are inherently more complicated than the "cash" underlying (equities in this case).

You can probably guess where I am going with this. You already know the answer to your question, it is just that the terminology may be new to you. Rather than tell you directly, its probaly best to present your question to you in more language that you may be more familiar with.

Your question is equivalent to this (leaving forex out for the time being, since it is a completely different asset class):

"I have no prior experience of mechanical vehicles, which do you suggest I start to learn:

a. Bicycle (Equities)
b. Motorized Biclycle a.k.a Motorcycle (Futures)
c. Helicopter (Options)
"

The difference between an option and a cash equity is as dramatic as the illustration above, just as a helicopter moves about in 3D space, and a bicycle moves in 2D space, an equity (and future) are instruments with linear (1D) risk, whereas options involve multi dimensional (actually 5 dimensions) risk. The difference is that stark.

Currencies are a different beast all together. Spot currencies are similar to cash equities, once you get your head around the fact that you are both short and long in the same trade.

Overall my recommendation would be to start with cash equities (any skills you pick up there, risk management, order placement, positioning etc), would be largely transferable to other markets. To even contemplate trading derivatives before having a grip on the cash underlying, well ....

 

[Rhody Trader]

Gotcha - what are the other considerations in terms of options?

The number of ways you can trade options is large. Some of them are more capital intensive than others. Also, some strategies have low odds of winning on a trade by trade basis (but pay off really big when they do win), so can suffer substantial drawdowns requiring a larger account balance to be able to weather those periods.

 

[texpert]

Hi SRosen,

--------

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Your question is equivalent to this (leaving forex out for the time being, since it is a completely different asset class):

"I have no prior experience of mechanical vehicles, which do you suggest I start to learn:

a. Bicycle (Equities)
b. Motorized Biclycle a.k.a Motorcycle (Futures)
c. Helicopter (Options)
"

The difference between an option and a cash equity is as dramatic as the illustration above, just as a helicopter moves about in 3D space, and a bicycle moves in 2D space, an equity (and future) are instruments with linear (1D) risk, whereas options involve multi dimensional (actually 5 dimensions) risk. The difference is that stark.

Currencies are a different beast all together. Spot currencies are similar to cash equities, once you get your head around the fact that you are both short and long in the same trade.

Overall my recommendation would be to start with cash equities (any skills you pick up there, risk management, order placement, positioning etc), would be largely transferable to other markets. To even contemplate trading derivatives before having a grip on the cash underlying, well ..

Thanks for this beautifully written analogy. Options are definitely the superjet of all trading instruments.

 

[Trader_Matt]

Picking a trading instrument is much like picking the style of clothes you wear. Personally, I day trade futures. I would say that swing trading equities is pretty easy, in that you can make money with bad entries and exits. Because it is a personal choice I wouldn't say one is necessarily the best to begin with. Asses your goals when it comes to trading and then decide which market you want to trade would be my advice to you.

 

[Macabel]

Start with Forex from home , once you acquire enough knowledge you can go into equities . If you do well give it a try in futures , thats where the real money is !