What are the risks of combining trading and investing?

There’s no getting around the risks associated with derivative products. It’s easy to lose track of the financial liability involved in trading with leverage. A leveraged trade going against you can cause damage to your wealth because any losses you incur are amplified. With a share dealing portfolio, you can’t lose any more than the initial value of your shares, but with derivative instruments you could lose more than you invested.

It’s incredibly important to use resources like demo trading environments before you start participating in the financial markets in this way. You can sign up for a free demo account loaded with $10,000 in virtual funds. Use it to get a feel for how much exposure you’ll get and at what margin.

If you’re using multiple products, it’s important to consider your whole portfolio in your risk management strategy. Don’t let short-term excitement become a hindrance to long-term wealth building. If executed poorly, a multi-product strategy can also introduce more risk to your portfolio.

For instance, you can reduce the diversification in a portfolio when you open trades that are highly correlated to your long-term holdings. This leaves you exposed to making losses in both your shares and your leveraged positions.

Finally, both leveraged trades and investments incur costs. It’s important that you know of all the charges involved in making a trade – such as spreads, commission fees and daily funding charges. Overtrading can have a negative effect on your account balance because each transaction you make may have accompanying costs.

Because derivative products are designed to take advantage of short-term price movements, some of them are structured in a way that you’ll be charged a fee when you hold them overnight. Always factor in the money you’ll lose to fees when you’re considering opening a position.