Traders and investors should keep in mind these three key distinctions. Inconsistency may result from ignoring them. A new trader, for instance, may confuse the phrases and implement the rules incorrectly, leading to unpredictable outcomes. When the distinctions between trading and investing are understood, both strategies may be used more effectively. The objective of every prudent investor is to acquire an asset with the expectation that its value will rise steadily over time.
Trading is the practice of buying and selling an asset with less than full certainty in the direction of its value to profit from small, rapid shifts in relative worth. The same goals, period, and confidence levels may be mapped out under two guidelines. This is not meant to be a comprehensive analysis of the differences between the regulations but rather to illustrate some of the most significant practical consequences.
First, we’ll go through long-term investment and then into day trading. If one were to invest just in the S&P500 index, he might anticipate an annualized return of around 10.9%. Investments like this may be entered into in a variety of ways. One option is to invest in the Exchange Traded Fund (ETF) represented by the SPY, which follows the S&P500 index and trades like a stock.
Another option is to invest in a mutual fund that follows the S&P500. There are further possibilities. One may find dozens of mutual funds with five-year annualized returns over 20% using the mutual fund screener. However, if feasible, one should look for a screener that provides results going back at least ten years.
Futures Trading
Trading in equity futures arbitrage is taking advantage of discrepancies between two markets. You may also hear people refer to it as “Pairs Trading,” “Margin Trading,” or “Hedge Trading.” When you do S&P500 trading against the S&P500 futures is an example of arbitrage trading. Still, the method may be used in any market, including Forex, Commodities, stock equities futures, and indices.
When trading the S&P 500 and S&P 500 Futures, it is feasible to secure a profit by going long on one while shorting the other, provided that the move is made appropriately. In other words, going long on one while shorting the other. To achieve success in this kind of transaction, it is essential to understand both Fair Value and how Futures are priced.
It’s a frequent misperception that shorting the cash market can be accomplished simply by entering along on the Futures contract while long the Cash, say if the S&P500 Futures are now 6 points below the current cash price. While it is possible to profit via arbitrage trading, the margins in the preceding example are likely small. They will only persist until the market’s natural buying and selling forces realign prices.
While the potential returns from arbitrage trading-related products are high, most traders will find that the spreads are too broad, and they lack the resources to trade quickly enough to take advantage of opportunities as they come. Although what most market participants call. Pair trading is really an Arbitrage trading method. It does not provide the sure profits that the first example did.
