Example: How to trade in Gold ?
How to profit from trading in gold?
Assuming that the current value of one ounce (~28.3 grams) of gold is $1 000. You suppose that price for gold will rise in the short run.
You go to a bank and buy a bar of gold (you pay $1 000 in cash and get 1 ounce of gold in the form of the bar). By doing so, you execute the first part of the trade – you open the trade.
The gold price rises up to $1 050 in a month. You go to the bank and sell your gold (you give 1 ounce of gold in the form of the bar and get $1 050 in cash). By doing so, you execute the second (the last) part of the trade – you close the trade.
As a result, you earn a speculative profit of $50: you paid $1 000 for buying the gold bar and got $1 050 for selling it, so your margin is $50.
At first glance, the sum of money doesn’t seem considerable. However, if you increase a volume of the trade, the profit will increase considerably too. If you buy 100 ounces of gold, the profit will amount to $5 000. If you buy 1 000 ounces of gold, the profit will amount to $50 000.
Question: Where can you obtain a large sum of money to trade such a large lot of gold?
Solution: The sum of money can be obtained from a broker as leverage for free.
If you have only $1 000 at your disposal, you can buy and sell 100 ounces of gold or ~2.83 kilograms. This lot of gold costs $100 000 at the price of $1 000 per ounce.
What is leverage?
The leverage allows investing a sum, which exceeds your own funds by far. The leverage is offered by brokers to carry out speculative transactions. Leverage of 1:100 means that you can invest the sum of money that exceeds your own funds by hundred times. On the one hand, the leverage creates great possibilities for profit-making; on the other hand, it increases your risks.
Benefits of online trading:
- You don’t have to buy and store a real commodity or an asset
- You can use the leverage for speculative transactions
- You can earn profit both when a price rises or falls.
- You can buy and sell an asset immediately (with a single click)
- You can monitor price changes in a real-time mode
- You can make trades virtually 24 hours a day from anywhere in the world (via Internet)