Home Business Insights & Advice What are the risks involved in trading on the financial market?

What are the risks involved in trading on the financial market?

by Sarah Dunsby
27th Jan 19 8:14 am

The news provide viewers with an overview of the stock exchange during the week. It explains the current trading day and the most important events on the financial market. Of course, the general news and topics about economic developments are also covered. The media is currently focusing on the economic situation of the European Union as well as global trade and free trade agreements.

A few years ago it was the global economic crisis that can still be felt today. But what makes trading on the financial market so risky and why do wrong decisions or speculations have such a far-reaching negative effect? This article explains the risks of the financial market for its participants and how to protect oneself against them.

Global trade and its risks

In order to be able to explain the risks a little better, it makes sense to draw a few boundaries in advance on the market as well as its participants. First of all, trading in financial products does not have to be global, but can only be done on a national basis. Furthermore, a distinction must be made between the activities of smaller stock exchange traders and private traders, who trade on the PC with a few euros, and the activities of the large players on the market, who trade millions of euros. Although of course all parties expect risk, the losses as well as the extent of the consequences for the entire financial world are on a completely different level.

Thus, the financial crisis in 2007, which had its origin in a speculative bubble for real estate in the USA, has consequences for the entire world. Entire companies went bankrupt, loans could no longer be paid and people from all walks of life lost their homes and belongings. It is hard to believe that the effects have been felt globally to this day. This is due to global trade, which makes it possible, for example, for German banks to be shareholders in investments and speculations that no longer even have their goal in Europe.

The basis of the risks

In order to better understand and explain the risks and opportunities on the financial market, it makes sense to know what types of risks exist on the market. The risk on the financial market consists in losing the invested liquid funds. This can be the case when buying a share because the value of the share falls or when trading in binary options because the chosen option ends out of the money. Accordingly, the risk in trading is always that the money invested will be lost. Another example would be that the value of a purchased property decreases over time. This can be due to the fact that the companies migrate from the village, thus lacking jobs, the infrastructure suffers and social problems increase with the increasing poverty. Although the risks on the financial market are different, they are much greater.

The risks on the financial market

There are many possible reasons for the risk that an investment or option may fail. The value of a company’s share, for example, can decrease because a new brand product does not meet expectations, new market participants are more attractive, the company is involved in scandals or there are new technological developments. The value of a currency can decrease if the general economic situation of the country deteriorates, the destination is no longer desired as a holiday destination, or there are crises in the country. To put it briefly, there are almost infinite reasons for risks. On the other hand, they do not have to be permanent and can be predicted to a certain extent.

Analysing and evaluating the risks

In principle, the trader does not need much to evaluate the opportunities and risks. One is information about trading and news about current events in the world of finance and politics. Furthermore, the analysis tools are used to assess the risk as well as to identify market trends. As with all types of investment, knowledge is the best foundation for success. This is of course also the case with the financial market. This includes dealing with the news on a daily basis.

This is the first step towards a better assessment of market risks. The next step is to use the analysis tools. In concrete terms, this means, for example, looking at the Forex market, i.e. the currency market, and assessing a few currency pairs more precisely on the basis of the latest news. The volatility of the market is examined, i.e. the range of price movements. If the market has too much volatility or unpredictable fluctuations, the risk is too great. A healthy mediocrity of volatility is ideal for trading. Different analysis tools are then used to calculate the price and thus provide forecasts for the price development.

Automatic trading on the financial market

The question as to why there are any bad investments at all is therefore entirely justified. Especially if one takes into account the fact that algorithms are now trading on the stock exchange. They buy and sell stocks, government bonds, currencies, foreign exchange and other financial products within fractions of a second. If a purchase has been made and there is a possibility of selling with a profit margin, the shares are sold in the same second. The reason why there are still risks is because not only algorithms act on the market, but also real people participate. In addition, the algorithms work very successfully, but still not always one hundred percent secure, because external influences from politics, business and society have a direct effect on the market. Every kind of investment always has a certain risk, no matter who is acting and by what means.

The risk of trading with online brokers from home

As already mentioned, a small, almost transparent line needs to be drawn on this issue, because global trading in algorithms is different from when a private trader trades a few euros a day. The online brokers offer traders the trading platform with the most important tools and analysis tools as well as extensive blogs on the subject of trading and the latest news.

The website https://www.bettingtips.net/ contains a large number of online services, which can be easily evaluated thanks to a search function. A very practical and especially for beginners important function is a demo account, which makes it possible to trade with virtual money. This allows the first trades to be carried out without risk, the analysis tools to be understood and experiences to be made. This is probably the best and safest way for us to learn to assess the risks on the market.

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