It’s important for everyone to have the skills and understanding to manage their money effectively and make the best financial decisions for their situation – especially if they are looking to get into trading. At Alpari, we’re committed to empowering traders and investors with knowledge, so we have put together this article covering trading fundamentals and providing practical financial management tips.
Before beginner traders and investors think about purchasing their first assets, there are a few things they need to know first.
Budgeting effectively is perhaps the most important part of managing your finances, deciding how much of your capital to allocate towards your investments versus everyday purchases. The 50/30/20 rule is a famous rule of thumb, which provides a suggested framework for budgeting: 50% of your income should go towards needs, like rent and food. 30% should go towards wants, such as travel, subscriptions and memberships. Finally, 20% should go towards your savings or investments.
However, the 20% that goes into savings should ideally be broken down further. Another general rule is that it is best to build an emergency fund that can be readily accessed to cover your expenses before you begin putting money into trades and investments. An emergency fund is typically considered to be enough to cover you for approximately 6 months, in order to protect you from unexpected expenses.
Understanding tax law is also highly important for investors and traders. Your financial decisions will have different tax implications depending on the country you reside in. For instance, some investors could be subject to capital gains tax, being taxed on a percentage of their profit when they sell an asset.
In the US, this is a maximum of 20%, and Denmark has the world’s highest maximum rate at 42%. In contrast, in the UAE, where there is no personal income tax overall, there is no capital gains tax. And in India, long term capital gains (assets that have been held for a year or more) are subject to a flat rate of 12.5% – short term capital gains are taxed higher, at 20%.
There are a few concepts that are especially important for traders. Firstly, diversification is an essential part of trading – spreading capital across different markets and asset classes reduces the level of risk the trader is exposed to. At Alpari, we offer Forex, stocks, indices, ETFs, commodities and crypto, meaning that our community can make sure their portfolio with us is highly diversified.
Leverage is another key characteristic of trading, in which traders can borrow funds from their broker in order to control a larger position. This means that they might be able to earn a bigger profit with only a small deposit – but it can also mean that they are exposed to a higher potential loss. Using leverage, they might be able to either earn or lose a figure that’s higher than what they used to open the position. Of course, there is an element of risk involved in using leverage.
Risk tolerance is another concept that all traders should be aware of. This is the idea that everyone has a different level of risk that they are able and willing to accept when it comes to their trading activity. While riskier trades can come with a higher chance of the trader losing their investment, they can also come with potentially higher rewards. Based on your financial goals as well as your comfort, how much of your capital is it acceptable to lose?
Beginner traders can get started with a demo account, which many brokers offer, including us. An Alpari Practice account is a risk-free environment in which you can observe market movements in real time, practice trading strategies and try using leverage without putting capital at stake. Users can test out diversification strategies with their demo account, exploring what mix of financial instruments they are most interested in, and testing out how much they could stand to earn in profit.
Practice accounts are also a great opportunity to explore the many Pro Trading Tools available on Alpari, including technical indicators that can help you carry out in-depth analysis of the performance of various assets. Getting familiar with these tools on a Practice account will make it easier to use them to plan and carry out real trades.
Once traders feel comfortable with their demo account, at Alpari we have a number of bonuses and promotions for our community. We offer our users a Birthday Bonus, as well as regular special offers and promotions. All Alpari traders are also registered automatically into our loyalty programme, Alpari Rewards, and receive points on every trade that move them up through our Tiers from Bronze all the way up to VIP Master. The higher the tier, the more reward points the user is awarded. These points can be used to redeem exclusive perks, or exchange for cash or trading funds.
Financial literacy education never stops – traders should always be looking to keep their knowledge refreshed, with markets constantly on the move, and financial and legal regulations shifting. Reading respected financial news outlets like Reuters, Bloomberg and Barron’s can help traders stay informed. Alpari’s educational resources, including Practice accounts, are also on hand to help traders stay confident and up to date in a changing environment.
We hope that this overview of financial management and trading principles has been helpful. While some aspects of financial literacy are relevant to everyone, such as the 50/30/20 rule, there are some concepts that traders in particular should know about, including diversification, leverage and risk tolerance. Here at Alpari, we are dedicated to supporting traders as they grow in confidence, knowledge and experience in the markets.
