Chapter 1




Peter Read, CEO and Founder of Pelican
Apr 18, 2018


The purpose of Pelican academy is to provide people who are new to trading with a grounding in the key concepts and an understanding of the main components that go into making a trade. By the end of these 9 chapters we expect you to have sufficient knowledge to open an account with Pelican and confidently navigate your way around.


What is trading?



We start by addressing the most obvious question of all; What is trading? The principles of trading are the same the world over whether you run a market stall, a second hand car sales garage in Essex or a stock broker in the City of London; you are looking to buy something cheaply, wait for the price to rise, whereby you sell it and make a profit. The financial variety simply means that you are buying and selling finance contracts rather than physical goods. These are typically a lot more humdrum than might be imagined and are usually shares such as Vodafone or BP or stock market indices like the FTSE-100. 




At this point it is important to make the distinction between financial investors and financial traders. Investing infers holding assets for a longer time period. So buying a house is often referred to as an investment as people live in them for a number of years. By contrast, trading suggests a much shorter time frame. As the timeframes are shorter and the volumes greater traders tend to use different instruments to investors. Instead of shares or bonds, which require lots of paperwork, traders will often use Contracts for Difference (CfDs) or Spread-bets as they are known in the UK. 



What are CfDs and Spreadbets


The story of Spread-betting’s origins neatly explains how they work. Back in the 1970’s an enterprising fellow called Stuart Wheeler noticed that investors in the UK wanted to buy or sell gold, but it was extremely difficult to do in its physical form. The smallest unit size was prohibitively large (e.g. $1,000 per troy ounce), not to mention the countless issues that come with storage and delivery of gold bars. Wheeler realised that these issues could be easily circumvented by running a betting book on the price of gold published by the Bank of England. His clients could then bet on the price movement of gold without actually owning it and in any unit size they wanted.




The basic mechanics of spread betting haven't changed. Brokerages, like IG, purchase prices of markets (e.g. Facebook or Vodafone) from exchanges like the London Stock Exchange. The brokerages then run a betting book on the basis of the prices they receive. They will publish a price to Buy and a price to Sell, the difference being the “spread.” You, as a punter, can then speculate whether the price of a particular market will rise or fall. If your predictions are correct, you make money, if not you lose.




Profiting from Rising or Falling markets




Another factor that separates traders from investors is that they are agnostic to which direction the price moves. An investor can only attempt to buy low and sell high, known as “going long”. Traders can benefit from falling prices as much as rising prices. Betting that the price of a market will fall is known as “going short”. We’ll explain how in Chapter 7.



 












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Your capital is at risk. Losses can exceed deposits when trading CFDs or spread betting.



Spread betting and CFD trading are leveraged products and as such carry a high level of risk to your capital which can result in losses greater than your initial deposit. These products may not be suitable for all investors. CFDs are not suitable for pension building and income. Ensure you fully understand all risks involved and seek independent advice if necessary.
Pelican Trading is a trading name of London & Eastern LLP. London & Eastern is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 534484. London & Eastern is registered in England & Wales, registered office at 85 Great Portland Street, First Floor, London, W1 W7LT, company number OC345870.



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