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Trading Individual Stock Markets Using Leveraged Derivatives Markets

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Individual stock markets (e.g. XYZ company, etc.) are one of the most popular financial markets for traders, and the most popular financial market for investors, but most traders and investors trade individual stock markets incorrectly.

Trading Individual Stock Markets Incorrectly

Individual stock markets are most often traded using cash, which is to say that the full value of the trade (i.e. the full value of the shares that are being traded) is required as trading capital in order to make the trade. For example, if an investor wants to buy one thousand shares of XYZ company at a price of $55, the investor must have $55,000 in trading capital (usually in cash) available (and deposited with their brokerage).

While in theory, there is nothing wrong with trading an individual stock market using cash, it requires that the entire value of the trade (i.e. the value of the shares that are being traded) is at risk, it is by no means an efficient use of trading capital, and perhaps most importantly, is not the way that professional traders or professional investors trade individual stock markets.

Trading Individual Stock Markets Correctly

Professional traders and professional investors always trade individual stock markets using the leveraged derivatives markets (e.g. the individual stock market's options or warrants markets). Trading an individual stock market using a leveraged derivative market only requires a fraction of the full value of the trade (i.e. a fraction of the full value of the shares that are being traded) in trading capital. For example, if buying one thousand shares of XYZ company at a price of $55 would require $55,000 in trading capital, buying the same (or at least the equivalent) one thousand shares of XYZ company using a leveraged derivative market could require only $13,750 in trading capital (i.e. 75% less trading capital).

Trading an individual stock market using a leveraged derivative market not only requires significantly less trading capital (which means that less trading capital is at risk), but is also a very efficient use of trading capital (as most of the trading capital is available for additional trades).

Example of an Individual Stock Market Trade Using a Leveraged Derivative Market

As an example of an individual stock market trade that is made using a leveraged derivative market, buying one thousand shares of XYZ company with a current market price of $36 could be accomplished via either of the following methods:

Individual Stock Market

  • Market - Individual Stock Market
  • Trade - Buy one thousand shares at a price of $36
  • Trade Value - $36,000
  • Trading Capital - $36,000

Leveraged Derivative Market

  • Market - Call Warrant Based Upon Individual Stock Market
  • Trade - Buy fifteen thousand call warrants at a price of $0.98
  • Trade Value - $14,700
  • Trading Capital - $14,700

As shown by the above example, making the individual stock market trade (or investment) using the leveraged derivatives market allows the same profit (or loss), but requires less than half of the trading capital, thereby allowing the trade to be made with less trading capital, or allowing the remaining trading capital to be used for additional trades.

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