The capital markets need facilitators. These businesses provide access to products like Forex, CFDs, commodities, indices, and stocks. They will offer you research, educational material, as well as a way to execute trades. Banks and brokers are market-makers and usually generate revenues by offering securities to their clients at a market price. You can also use different types of long and short-term trading strategies when trading at either a bank or a broker. These strategies can be used for both short-term trading or long-term investing.
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What Products Can you Trade?
The capital markets offer several different products that can allow you to generate revenue. The Forex market is the most liquid, with more than 6-trillion in notional value traded every day. This type of liquidity allows traders to enter and exit without any slippage. Slippage is when a market will move when a large trade comes into the market or when many people are trying to enter and exit on a stop loss.
Both brokers and banks facilitate the Forex markets. Banks tend to cater to institutional clients, while brokers generally offer products to both retail and institutional clients. Brokers will provide Forex transactions and contracts for differences (CFDs) that track the Forex market movements. There are substantial benefits of CFDs. These products offer margin allowing an investor to use borrowed capital to trade the Forex markets. This scenario is helpful, especially when engaging in short-term trading.
Brokers will also offer CFDs that track the commodity markets, the indices markets, stocks, and cryptocurrencies. Generally, banks do not offer CFDs to their clients. Both brokers and banks make money using a bid-offer spread. This spread is the difference between where a broker will purchase security and where they would be willing to sell it. The goal is to buy on the bid and sell on the offer and continuously make the spread.
Long-term Investing Versus Short-term Trading
Whether you decide to trade with a bank or a broker, you will need a strategy that will allow you to make money consistently over time. Your strategy could be a simple as purchasing an equity index like the S&P 500 or the Nasdaq 100. The S&P 500 index has compounded annual returns. For example, the S&P 500 index has a compounded annual return, including dividends of 13% during the past 40-years. If you exclude dividends, the compounded annual returns are 10%. If you decide that you want to buy and hold, you can buy the S&P 500 index, and you should expect robust returns over an extended period. You can also enhance those returns using a CFD. If you used the leverage of 10 to 1, your 10% annual returns on the S&P 500 index would be 100%. Alternatively, you might consider short-term trading strategies using both technical and fundamental analysis. While banks tend to provide information and research, they usually do not provide state-of-the-art trading platforms.
The Bottom Line
The upshot is that there are several ways to trade the capital markets to generate long-term wealth. This activity includes both long-term investing and short-term trading strategies. You can execute these strategies at both banks and brokers. There are several different types of markets that provide opportunities to generate income. These markets include commodities, Forex, equities, indices, and cryptocurrencies. Usually, banks and brokers will generate income through the bid-offer spread. They will also likely offer you research, educational tools and charting software.