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How to Become a Successful Trader

Most traders follow a strategy in investing their capital, which defines the rules of their success. Below are a few methods that can help traders with their success in the market, such as exploring penny stocks.

Penny stock or small-cap stocks require very low market capitalization. Further, these stocks have low liquidity, making it hard to convert into cash. Penny stocks require little investment money and can yield greater investment returns.

Picking the right stocks requires thorough research and an understanding of its fundamentals. For example, consider the company's earnings. However, penny stocks have high volatility, so their value rises and falls frequently.

Next, professionals should treat their trades like a business. The trader must take an active role in investing time and creating a strategy for obtaining returns. Also, traders should learn from their market mistakes and devise an approach to dealing with losses. All traders make mistakes.

Simultaneously, traders should cut their losses quickly. The market could rally, but the data might show that cutting losses remains the better approach.

Finally, traders should learn about multiple markets. By learning to trade in any market, the trader opens more money-making opportunities.

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Benefits of Futures Trading

Futures trading is a contractual agreement between two parties to buy or sell an asset at a future date for an agreed-upon price. The buyer of a futures contract commits themselves to purchase and take possession of an asset once the futures contract expires.

On the other hand, the seller of a futures contract accepts to supply and deliver the asset when the expiry date reaches. Since many consider futures trading cost-effective, it is the most popular investment technique in most financial markets. Futures trading improves diversification by allowing traders to deal in various asset classes, such as commodities and currencies.

Futures are traded in large volumes daily and are easily converted to cash since there are many buyers and sellers. Futures trading is ideal for beginner traders who want to closely monitor their investments and make the appropriate decisions. Futures trading also has the simplest requirements - all traders need are capital, a reputable broker, and a stable Internet connection.

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Different Ways to Trade Commodities

Raw materials such as agricultural products, energy, livestock, and precious metals are traded as commodities in the financial markets. While commodity prices can be highly volatile, traders can speculate on price fluctuations and invest opportunistically to generate profits. Investing in commodities also helps investors diversify their portfolios.

One of the ways to trade commodities is by purchasing the physical goods and storing them until their values have increased significantly enough to sell. This method is most common among individual investors who buy gold, silver, and other precious metals in various forms like bars, coins, and jewelry. Although investors benefit from their investments' actual possession and exposure, buying physical commodities comes with higher transaction costs. They typically pay a premium above the current market price due to the costs involved in the fabrication and transportation of the goods.

Producers of raw materials also use futures contracts to ensure a buyer agrees on a price, thereby hedging against market fluctuations. For example, a wheat farmer sells a futures contract involving 5000 bushels of wheat at $5 each in 90 days. If the price of wheat falls to $4 at expiry, the farmer takes a profit. On the other hand, the farmer misses out on profits if the wheat price at expiry is more than $5 each.

Investors do not need to be directly involved in buying and selling raw materials to trade in the market. They can generate profit by speculating on the value of a physical commodity and trading futures. Since investors do not intend to buy or deliver the physical goods, they liquidate or offset most contracts before delivery. If investors expect the price of a commodity to increase, they purchase futures or go long. On the other hand, they sell or short futures if they believe the price will fall.

Using the same example, investors may enter into a futures contract for 5,000 bushels of wheat at $6 each, valued at $30,000. At any point before the expiry, wheat prices could fluctuate and reach their peak. Should the price reach $10 before 90 days, they may decide to short their position and settle through their brokerage account. This gives them a $4 gain or a $20,000 profit.

Another way to trade in commodities is to buy a share of a company that uses the commodity. For example, an investor can purchase a stock of an agricultural company that sells wheat. Stock investments in commodities also follow the price of the raw materials. If wheat prices rise, companies involved in wheat production are also expected to be profitable and increase their prices.

However, investors in commodity stocks cannot rely solely on price fluctuations when speculating about the market. They must also assess how the company operates. While a price increase also raises the price of the company’s stock, problems in terms of management, production, and logistics could derail its progress.

Investors can also invest in commodities through mutual funds, exchange-traded funds (ETFs), and exchange-traded notes (ETNs). These investment vehicles pool money from small investors to form a large portfolio. In addition to tracking commodity prices, these funds can purchase futures contracts or invest in commodity stocks.

Commodity funds are generally affordable, accessible, and liquid, reducing the barrier to entry for small investors. Investors gain access to a wide range of commodities by investing in commodity funds. Investors also benefit from having a professional fund manager to oversee the portfolios. However, they have to incur additional management fees.

Similar to mutual funds, commodity pools and managed futures are useful investment vehicles. However, they are not publicly traded. As private funds, investors must gain approval before accessing the fund. They are also liquid and have higher risk-adjusted returns.

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Types of Trading Arbitrage Strategies

Traders routinely seek ways to profit from the markets. One way is through arbitrage, where the traders take advantage of share or stock price differences for a yield. Though the yield in an instant seems small, trading in large volumes frequently increases the profits to reasonable numbers.

There are different types of arbitrage, including pure, merger, and convertible, and the application areas and process. Pure arbitrage, the most basic form of arbitrage, involves purchasing and selling securities simultaneously in different markets, intending to profit from the differences between prices. Given the large number of markets, it is virtually impossible to sync the price of similar securities in different markets. The traders thus use the pure arbitrage strategy to take advantage of this out-of-sync scenario.

Pure arbitrage works best for large multinationals that list stock in markets in different countries. Also, foreign exchange differences lead to company stock pricing differences due to trading across countries or currencies. However, the increased use of technology in trading means more aligned and synchronized stock prices across different markets. Thus, pure arbitrage has become more challenging and rare to undertake.

The merger or risk arbitrage relates to merging parties such as businesses. In the business world, a merger typically involves two parties, referred to as the acquirer and the target. In a scenario where the target company is publicly traded, the acquirer must purchase any outstanding shares of the target company. In almost all cases, the purchase rate is higher than the prevailing market rate, translating to an advantage for the shareholders.

Investors usually purchase the shares before the deals become public. The purchase also drives the target company’s share stock closer to the price announced after the merger. Thus, a merger arbitrage means purchasing target company shares at a discounted cost, then making a profit once the merger goes through.

Trading in merger arbitrage can pose a risk to the traders. The merger may fail due to various reasons like the acquirer’s change of mind, changing market conditions, or merging refusal by regulatory bodies. The traders purchase the target company’s stock at a rate lower than the deal price to reduce the risks.

Lastly, convertible arbitrage deals with convertible notes and bonds. A typical conventional bond refers to a corporate debt that enables the bondholder to profit after a scheduled time. The convertible bond, however, though similar, has the added benefit of allowing the bondholder to convert the bond into shares in the company that has offered the bonds at a later date. In most cases, the shares are offered at a discounted rate. The company benefits by repaying convertible bonds at a lower interest rate through issuing shares, while the bondholder takes advantage of owning shares in the company at a lower rate and a total amount worth more than the value of the convertible bond.

Though considered a form of arbitrage, global macro strategy cannot be regarded as a distinct classification of arbitration. It refers to a strategy where a hedge or mutual fund bases the portfolios based on the economic status, principles, political status, or views of countries outside its base. The fund thus hinges on predictions of impactful large-scale events in other countries or continents and can place holdings on any type of security.