Forex trading has been considered a great source of passive income for more than a decade all around the world. More and more investors are joining the field of trading each day. However, along with the opportunities of generating rewarding returns, you are also exposed to a high-risk environment. Things are even more challenging when you live in a country like India, where not only your options are limited, but you also have to follow strict regulatory restrictions. This is why it is absolutely important to learn the basics of forex and get into the details before you start trading.
Basic Trading Features
The following list contains some of the most important features of forex trading for beginners in India that you need to know about before investing in an asset in the financial markets –
- Yield and Return
Yield and return stand for two ways you can measure the profitability of an asset within a certain period, often yearly. While yield refers to the earnings generated from the asset, return refers to the amount that the trader has gained or lost on the trade. Yield is represented as a percentage, while the return is represented as a currency value.
- Margin and Leverage
Margin simply means increasing the buying power of a trader or investor. Leverage allows traders to open larger positions with a small amount of their capital. To put it simply, the margin is the amount you need to open a position, while leverage is the multiple of exposure to account equity. The amount of margin is dependent on the requirements of the margin rate. It varies for different financial instruments, according to the liquidity and volatility of the market. Margin is represented in percentage, while leverage is represented in ratio. If the margin requirement for an asset is 5%, it means that you can apply 1:20 leverage to open a trade on it.
- Long and Short Position
While trading assets, investors can take two types of positions: long and short position. They can either purchase an asset (going long) or sell it (going short). You may break these two positions down further by two types of options: the call and put. The options an investor can take include entering a long call, a long put, a short call, or a short put. Investors can combine long and short positions in trading and hedging strategies.
When you have a long position in an asset, it means that you own that asset. Investors maintain long positions expecting that the price of the asset will rise in future. A short position, on the contrary, refers to the sale of an asset you do not own. Investors that sell short predict that the price of the asset will fall. If the price drops, they can purchase the share at a low price and win the trade. However, if the price of the stock goes up and the trader purchases it at a higher cost, they will meet a loss. It is better to stay away from short selling if you are not an experienced trader.
- Lots
A lot refers to the standardised number of units of a financial instrument that is being traded. The price of an asset often makes it not viable to trade just a single unit. In such cases, you can use a lot, which is a set amount of the said asset that is bought or sold by you in every transaction. If the lot amount is not standardised, then it is considered an odd lot. A market regulator like an exchange can set the value of a lot. The value is generally the minimum number of units of the specific asset that can be bought. This regulation means that the traders always know how much of a financial instrument they trade when they open a position.
Lot sizes can be different based on different markets and contracts. Certain markets have mini or micro contracts that are a fraction of the standard size of the contract. Subsequently, the lot sizes of the small contracts are a fraction of the standard.
- Liquidity
Liquidity usually refers to how fast or easily you can purchase or sell an asset in a market. You can sell liquid investments readily. The best part is that investors do not need to pay a hefty fee to get money when they need it. The liquidity of stock stands for how rapidly its shares can be purchased and sold without affecting the value of the stock substantially. You may find it difficult to sell stocks that have low liquidity. As a result, you may have to face a huge loss because of not being able to sell shares when you need to do so. You may opt for any of the methods explained below to measure liquidity –
- Market liquidity: It points to the condition of the market where traders can purchase sell assets quickly. Such liquidity is specifically evident when it comes to the financial market. When assets are converted into cash across markets, it is also referred to as ‘liquidity in economics’.
- Accounting liquidity: Accounting liquidity is constituted by the ease with which an individual or a company can meet financial obligations by using liquid assets. It involves the comparison of liquid assets held by the individual or the company to that of current liabilities in a financial year. You may measure accounting liquidity by cash ratio and current ratio.
Once you educate yourself about trading well, the next step is choosing a good broker to open a trading account.
Top 3 Brokers to Trade in India
Keep in mind that you must always go for a regulated broker because they offer at least a bit more security of your funds than the rest. There are plenty of scammers in the market, and you need to stay away from those if you do not want to lose all your hard-earned money. Apart from regulation, fees and commissions are other two important factors. Fees eat away profits, so try to choose a broker that keeps their commissions and fees at a minimum. Other things you should check are if the broker offers a low minimum deposit, if the trading platform has an easy-to-use interface, if the platform offers sophisticated and powerful trading tools, and if you can be updated with the latest economic events with the broker. A demo account is another essential feature of a decent broker, but let’s come to that later. Here are some of the top brokers you may choose to start trading in India –
- eToro – Trade stocks, CFDs, and currencies at zero commission on the eToro trading platform. Click here to visit eToro.
- IG – IG is the top CFD provider in the world with an easy-to-use platform, friendly support, and expert trade ideas. Click here to visit IG Markets.
- Forex.com – Choose this platform to maximise your trading potential with straightforward pricing options to suit your trading style. Click here to visit Forex.com.
You may visit any of the brokers to open start trading. However, before you open a live account, make sure to trade on a demo account.
What Is a Demo Account?
A demo account or a practice account is offered by a broker where traders can trade with virtual cash. It offers a risk-free environment for the traders to test their trading strategies, as well as the trading platform without risking losing their real money. If you are a beginner, then you must practise trading on a demo account first. After you gather some knowledge and experience, you can move on to live trading.
The Bottom Line
If you are a trader in India, then make sure to learn all rules and regulations regarding trading to avoid legal penalties. To know more about the laws related to forex, you may visit the website of the Securities and Exchange Board of India (SEBI).