Explaining cryptocurrencies: What is Bitcoin?

Bitcoin is the world’s most popular cryptocurrency. 

Since its inception in 2009, it has taken huge strides in both popularity and price.  

It is a digital currency, created, stored, and traded online using blockchain technology. It can be used as payment for online transactions, with many predicting Bitcoin could become the future of currency as the 21st century progresses. 

There are no physical Bitcoins. Instead, supply has been limited to 21 million digital coins, available online via blockchains. They are sold via exchanges, similar to other commodities, but are also traded via derivative products like CFDs. 

Its accessibility and divisibility mean Bitcoin is available to many investors, despite its supply. This can affect price movements, despite comparatively low overall supply. 

2020 was a very good year for Bitcoin. Its value skyrocketed, with valuations breaking over $36,000 in December. Its highs continued into 2021, when Bitcoin reached a new valuation of above $42,000 – an all-time high.  

At the time of writing, Bitcoin was valued at $35,418 per coin, showing the volatility all cryptocurrencies are subject too.  

What is driving Bitcoin valuations so high? 

It’s a classic case of supply vs. demand. Investors and traders see great potential in the crypto, thus prices are hitting new highs.  

Bitcoin is becoming more popular with major investment firms and companies like PayPal have started to accept it has a legitimate payment option on their platforms.  

Elsewhere, major investors have thrown their lot in with Bitcoin.  

40% of millennials also said they would consider investing in Bitcoin to guard against any future recession.  

Investors see it as a potential hedge against inflation that could come from Covid-19 stimulus packages.  

Others see Bitcoin as a safe haven play like gold.  

How is Bitcoin traded? 

Bitcoins are sold via exchanges for investors looking to purchase the coins. Bitfinex is the US’ largest Bitcoin exchange with Coinbase and Kraken other popular exchanges. 

It is very accessible and can also be divided up into smaller individual units. The smallest tradeable unit is 0.00000001 of a Bitcoin – called a “Satoshi” after the pseudonymous developer behind Crypto the crypto. 

Traders are turning to derivatives to trade Bitcoin, using products like CFDs and futures. These are available to trade via Marketsx – but please be aware trading any CFDs or assets contains risk of capital loss. Only trade if you can afford any potential losses.

How much higher can Bitcoin go?

  • JPMorgan strategists see Bitcoin rising to $146,000 
  • Bullish thesis based on replacing gold as value store 
  • Rising yields and inflation breakevens also supportive 

Just how high can Bitcoin go from here? After a remarkable 2020 and a fresh surge in the first trading days of 2021, some are starting to talk up the prospect of a multi-year bull cycle for Bitcoin. 

In a note published last year, JPMorgan strategists highlighted that the cryptocurrency valuations could rise significantly above where they might be justified as a ‘store of wealth’ because they also have utility as a means of payment. “The more economic agents accept cryptocurrencies as a means of payment in the future, the higher their utility and value,” they explained. “Cryptocurrencies derive value not only because they serve as stores of wealth but also due to their utility as means of payment.” 

The move by PayPal to enable users to buy, sell and hold a range of cryptocurrencies was a key move encouraging the price of Bitcoin to rally from around the $10k mark.  

Inflation 

US 10-year breakeven inflation expectations rose above 2% for the first time in over two years at the start of 2021. US 10 year yields also rose above 1% for the first time in nine months, with the 2s10s curve steepening further to 0.89%, the widest in over 3 years. The 5s30s spread was at its widest since 2016.  

Encouraged by the development of vaccines and a massive increase in the money supply, many see inflation coming over the hill. The massive increase in the supply of money as a result of the fiscal and monetary response to the pandemic may lead to a far more inflationary environment than we have seen for some time.  

 

Chart: US M2 money stock has risen like never before 

Significant expansion of the supply of money does not always create inflation. But in the words of Milton Friedman, “inflation is always and everywhere a monetary phenomenon that arises from a more rapid expansion in the quantity of money than in total output”. This time too, unlike in the wake of 2008/09 there is coordinated fiscal expansion. Whether or not the current phase of money printing leads to inflation (it did not after the great financial crisis because the money was largely absorbed by banks on their balance sheets) will ultimately come down to whether the Fed can increase interest rates enough to suck the money it printed back out of the system.  

On that front, it has been made abundantly clear that the Fed will not raise rates too soon. Average inflation targeting – as adopted by the FOMC in the second half of last year – implies quite the reverse and a willingness to let the economy – and inflation – run hot. The worry is that inflation expectations become unanchored as they did in the 1970s and the Fed loses control. All this favours hedges like gold and, increasingly it would seem, Bitcoin. 

“Owning Bitcoin is a great way to defend oneself against the GMI [great monetary inflation], given the current fact set,” veteran US investors Paul Tudor Jones wrote in May last year to investors. He now has about 2% of assets invested in Bitcoin. 

Chart: US 10 breakeven inflation expectations have risen above 2% for the first time in two years 

Millennial gold

Increasingly, younger investors are pivoting towards Bitcoin over gold. Gold has traditionally been the non-yielding inflation hedge but it’s days may be numbered. In a world of negative real rates, both gold and Bitcoin have advantaged, but younger cohorts price the lustre of digital. 

An important divergence between the behaviour of the older versus younger cohorts of the retail investors’ universe has been their preference for ‘alternative’ currencies,” write the well-followed Nikolaos Panigirtzoglou and his JPM team.  

In a later note dated January 4th, they noted that Bitcoin’s competition has already started with $3bn of inflows into the Grayscale Bitcoin Trust and $7bn of outflows from gold ETFs since October. A “crowding out” of gold over time, given the size of private investment in the asset, would imply “big upside” for Bitcoin over the coming years. To reach the size of the gold market today, Bitcoin would need to rise x4.6, which would take the price to $146,000. This is not a price prediction but based on their understanding of the mechanics of the market, a legitimate target if you believe that Bitcoin could become an equal to gold some day.  

Indeed, they stress that it is unlikely that institutional investors will allocate funds to Bitcoin commensurate with gold without a “convergence in volatilities”. 

Furthermore, when looking at volatility, they note that Bitcoin consumes 3.4x as much ‘risk capital’ as gold, whilst the Grayscale fund consumes 5.1x as much. Taking average at 4.3x and you are close to the 4.6x they note is required to achieve parity with the private gold marketSo, if Bitcoin already consumes almost as much risk capital as gold, the upside for Bitcoin may well be capped and its equalization with gold almost accomplished. 

Institutional interest in Bitcoin

So what marks out the bull run of 2020/21 with the boom-and-bust of 2017/18? Clearly institutional investors are showing more appetite. The move into the Grayscale fund is instructive – lots of investors will only be allowed exposure to Bitcoin via fund form for regulatory and risk management purposes.  

Panigirtzoglou and his team say: “There is little doubt that the institutional flow impulse into Bitcoin is what distinguishes 2020 from 2017.” However, it would be unwise to see these flows as being driven entirely by long-term investors. 

“We believe,” they continue, “that a significant component of last year’s institutional flows into Bitcoin reflect speculative investors seeking to front-run other more real-money institutional investors. The JPM highlight the “frothy” positioning in CME Bitcoin futures as evidence of this trend. 

Incorporating ETFs into you Investment Strategy

Adding ETFs to your existing investment strategy can help diversify your portfolio and give you access to markets you may not have considered before. Here’s a look at what ETFs are and how to use them. 

Investing in ETFs 

What are ETFs? 

ETF is short for exchange traded funds. They combine the features of funds and equities into one instrument. Like other investment funds, they group together various different assets, such as stocks or commodities. This helps the ETF track the value of its underlying market as closely as possible. 

For instance, there are ETFs that track the FTSE 100, containing constituents of that index proportional to the FTSE’s price. Other exchange traded funds may group together companies working in certain sectors, like lithium producers, or follow an asset like gold. 

Trading ETFs works similarly to how commodities or shares are traded in that they are sold via exchanges. Each fund is split up into units which you can buy or sell. This way, you can get exposure to a whole sector by buying or trading a single unit of this instrument. 

Why add ETFs to your investment strategy? 

There are lots of reasons why institutional investors put their money into exchange traded funds. 

  • Diversity – Portfolio diversification is used by successful investors to protect against risk. ETF shares allow them to hedge against negative movements in single sectors or markets. This is because this type of instrument offers access to multiple markets in a single trade. They can also be used to trade multiple asset classes, such as equities, commodities, and bonds. 
  • Transparency – Inside ETFs, you can find all the assets it holds, giving you good visibility to your exposure. Additionally, because they are traded like shares on exchanges, they are more easily accessible and tradeable than other types of fund. 
  • Variety – As mentioned above, exchange traded funds offer just as much variety as stocks and other asset classes. They can also be used to employ any number of different investment strategies inline with individual investment goals, such as increasing capital, portfolio hedging, or looking for new investment opportunities. 

Choosing the right ETF 

Here are some considerations to take into account when adding ETFs to your portfolio or investment strategy. 

  • Benchmark index – With hundreds of thousands of options available, you should select a benchmark index that suits your trading style, interests and overall strategy. For instance, if you think renewable energy is worth investing, you may select a renewables ETF full of green energy stocks. 
  • Fund size – Some funds will naturally be larger than others. Larger funds tend to benefit from economies of scale, cutting fees and saving investors funds in the long run. They often have better liquidity too. Larger liquidity often means better spreads, lowering transaction costs. 
  • Fund structure – There are two main types of ETF available. Physically replicated ETFs use assets to track their index, while synthetically replicated ETFs use derivatives. Each of these types of ETF has different features and benefits that you should consider before buying. Physical replication offers greater transparency into the fund’s assets and is generally considered the less risky option. Conversely, some markets make physical replication either hugely inefficient or just impossible, so synthetic replication is used here. 

How to Buy, Sell & Trade Stocks

Buying, selling and trading stocks is one of the most popular way to trade in the world. If you’re a novice, however, it can be quite intimidating. Here’s a quick guide on what you should know before you take your first share trading steps. 

Buying, selling & trading stocks 

How stocks work 

Stocks, also called equities or shares, are small fractions of a publicly-traded company that can be bought or sold on stock exchanges.  

Stock exchanges are found all around the world, with the New York Stock Exchange (NYSE) probably being the most famous. Business is done in person here. Brokers place orders on behalf of their clients which are passed onto floor traders who then find other traders looking for the other half of the deal, i.e., a trader selling apple shares would need to find a trader looking to buy them. 

Other exchanges are done electronically. The NASDAQ, for example, is a computer-based stock exchange where trades are all done digitally. 

Over the counter trades, OTCs, are made directly between parties without an exchange acting as the middleman between traders. If you were to buy and sell stock CFDs on our Marketx trading platform, for instance, that would be an OTC trade. On the other hand, if you were to buy and sell stocks on our Marketsi Share Dealing platform you would be transacting directly via the exchange. 

Trading platforms like Marketsx or our Share Dealing platform have become exceptionally popular ways to buy, sell and trade stocks. They’re generally accessible anywhere via online portals and offer a wealth of shares to choose from.  

What affects share prices? 

Trading stocks is all tied in with a company or asset’s share price. You’re probably familiar with the old investor mantrabuy low and sell high. While it might seem a little cliché, that’s the principle that drives investing. It means buying when share prices are low and selling them when share prices are high. 

When a company is first listed on a stock exchange, it makes its initial public offering (IPO). The IPO price is the value of a single share at the time of the company’s first listing. After this, stock prices will begin to fluctuate. 

Its important to note that company stock is always limited. There is always a finite number of shares available. A company can issue more shares, or buy back shares from investors, but the number of actual shares in circulation is always known.  

Share prices are affected by various different factors. 

When there are more buyers than sellers on the market, then there is a good chance there is high demand for that particular stock, and its price will rise. The opposite is true. If there are more sellers, then this indicates a decline in demand, so the price will fall. 

Fluctuations in share prices are caused by: 

  • Earnings reports – Companies generally release their financial performance reports once every quarter and produce a full report by the end of their financial yearTraders and investors use the information in these reports, which include revenue, profit and earnings per share (EPS) as part of their fundamental analysis. These releases will affect share price movements. 
  • Macroeconomic data – The overall health of the economy companies operate in will affect growth. Data releases such as gross domestic product (GDP) and retail sales can have a significant influence on company share prices. Strong data can cause them to rise. Weak data can cause them to fall. 
  • Interest rates – Individuals potentially won’t need to take big risks to get healthy returns if interest rates are high. They may save instead. This can cause the stock market to see less investment. If signals from a central bank make it likely that it will raise interest rates, demand for shares may fall. 
  • Market sentiment – Share price movements aren’t always based on fundamental analysis. The view that the public, as well as market participants, have on a particular stock can also cause demand to fluctuate. This is how speculative bubbles are formed. 

The difference between buying & trading stocks 

Before you begin, it’s important to learn the difference between investing and share trading. The key differences are: 

  • The timeframe positions are held for 
  • How profit is made 

Investing 

Investors buy shares outright. They hope that they will increase in price so they can be sold for a profit at a later date. That means they tend to hold onto shares for a long period of time, so they can attempt to profit from any changes in share price and through any dividend payments they may be accorded as share owners. 

Our Share Dealing and Investment Strategy Builder platforms have been developed with investors in mind.  

Trading 

Trading stocks uses derivative products like stock contracts for difference (CFDs) or spread bets. This means they take their value from the underlying market the asset is drawn from. Traders in this case do not own the shares. However, they can make a profit on the share price movement from rising or falling shares. As such, these trades take short to medium-term positions, instead of long ones. 

Risks of share trading 

Both investing and trading are inherently risky, but the risks associated with each activity differ. 

When investing in stocks, your risk is limited to your initial outlay, i.e. the amount you paid for the stocks. For example, if you spent £1,000 buying shares, all you could ever lose would be £1,000, even accounting for share price movements.  

Trading, however, is done with leveraged products (CFDs, spread bets). Leveraged products allow traders to open positions by placing down a percentage of the asset they wish to trade’s initial value. That can help maximise profits – but it can also mean you make significant losses if your trade moves against you.  

Negative balance protection is offered by Markets.com at no extra cost, so if your balance does move into the negative, it will be bought back up to zero. However, be warned, you can lose money if trades move in the opposite direction when using leveraged products.

A Complete Guide to Day Trading for Beginners

Day trading is one of the most popular ways to trade in the UK. If you’re unsure what it is, or how to get started, here’s what you need to know. 

Day trading for beginners 

What is day trading? 

Day trading is the act of buying and selling financial instruments in a single day. You close your open positions at the end of the day and start again the next. Day traders buy and sell lots of different assets within the same day, sometimes multiple times a day, so they can capitalise on small market movements.  

Be warned: this type of trading activity is not suited for part timers. It requires a lot of time, attention and dedication to be successful at. Day traders make a lot of quick decisions, executing many daily trades for comparatively small profit. This is basically the opposite of conventional investment strategies which are based on price movements over longer periods of time. 

Getting started with day trading 

A good approach to day trading for beginners is: 

  • Research markets you can day trade 
  • Establish a trading strategy 

Here’s how do to just that. 

Markets for day trading 

Markets most associated with day trading are those with fixed closes, i.e. are only open for regular trading hours. While this may be the case, you can still trade across markets that are open for 24 hours. 

Ultimately, the best markets for day trading will be down to your personal preferences. Think about what you’re interested in, what you can budget for, and how much time you want to spend trading. 

Popular day traded markets include: 

  • Forex 
  • Shares 
  • Indices 

Forex 

Forex day trading revolves around trading currency pairs and is a popular choice for novices. There are lots of different currency pairings out there like GBP/USD or EUR/USD, and high market liquidity makes it easy for currencies to be bought and sold. Traders often use forex day trades to avoid fees associated with rolling over positions, and lower risk of being exposed to overnight market movements. 

Shares 

Shares offer even more variety than forex. Their ready availability makes them very attractive for newcomers. When day trading stocks on equity markets, positions are generally closed at the end of the day. This is done to avoid gapping risk. Gapping risk occurs when factors like news or economic influences cause a company’s share price to open much higher or lower compared with the previous day’s close. 

These are some of our most popular day trading stocks. 

Indices 

When you trade indices, you are trading on the performance of a group of shares listed together on an index. Think stocks listed on indices like the FTSE 100, the top 100 largest companies listed on the London Stock Exchange, for example. Selecting indices gives you exposure to a larger position of the stock market than trading individual stock day trading. Like shares, it’s common to close index positions at the end of the day to a) keep in line with market opening hours and b) protect against gapping.  

5 day trading strategies to consider 

Closing trades at the day’s end isn’t a strategy in and of itself. It’s more a trading style. Instead, we’ll look at five common day trading strategies that show how different approaches can potentially lead to profit. 

Trend trading 

Trend trading following the direction of asset prices, then buying or selling depending on which direction the trend is moving in. 

If there is an upward trend in an asset, where its price might be consistently growing in price, then traders would take a long position and buy it. Likewise, if an asset is showing a consistent downward trend, then trades would take a short position and sell. 

Trend trading is not exclusively used by day traders. You can keep a position open for as long as the trend continues. However, to stick with intra-day trading principles, you’d close your position before the day is over. 

Swing trading 

Short term price movements are the focus of swing traders. They base this off an assumption that prices never go in one direction. They fluctuate instead. Swing traders are looking to make money from an asset’s movements up and down in short timeframes.  

Trend traders want to take advantage of long-term market trends. Swing traders focus more on reversals on price movements instead to make their profits. It is a skill to be able to spot these reversals ahead of time, so may not a suitable strategy for day trading beginners. 

Scalping 

This is a short-term strategy that has the potential to make small but frequent profits. Scalping focuses on achieving a high win rate. The idea is that you can build a big trading account by taking lots of smaller profits over time just as easily as placing fewer trades with longer timeframes.  

One thing to note is that scalping requires discipline. You will need a strict exit strategy because losses can mount quickly to counteract any profits made.  

Mean reversion 

Mean reversion is based around the principle that prices and other value metrics like price-to-earnings (P/E) ratios, always eventually move back to their historical mean value, i.e. its average value. 

Technical analysis is required to pull off a successful mean reversion-based day trading strategy. You need to be able to catch assets where recent performance has been very different from their historical mean. Traders employing this strategy will take advantage of the return trajectory to make profits. 

Money flows 

Money flow is a technical indicator that shows when an asset could be oversold or overbought. Rather than measuring the asset’s price by itself, money flow adds volume to see how many times the asset has been bought or sold across the day. 

The number of trades from the current day is compared against the previous day’s levels to find if the money flow was positive or negative. A score of 80 or higher shows an asset has been overbought. This is a signal for a day trader to sell. A score of 20 or under shows oversold market conditions, which is a buy signal. 

Factors that affect day trading 

Before you begin, familiarise yourself with some of the key factors day trading can be affected by. These apply for any market, whether you’re thinking of exploring forex day trading, shares, indices or other financial instruments.  

Factors to watch include: 

  • Liquidity – Liquidity refers to how easily and quickly positions can be entered and exited. High liquidity is what day traders want because their whole approach is based around making multiple trades across the day. 
  • Volatility – Volatility refers to how rapidly an asset’s price moves. If high volatility is expected throughout the day for a particular asset, day traders will watch it closely as a lot of opportunities for short-term profits can potentially be created. 
  • Trading volume – Trading volume is the measure of how many times an asset has been bought or sold in a given period. High trading volume shows a lot of interest in an asset and it can be useful for establishing entry and exit points. 

A beginner’s approach to choosing how to day trade 

Firstly, decide what product you want to trade with. Derivates, such as CFDs and spread bets, let you day trade without owning the underlying asset, which could be ideal for you as a beginner. You can close or open positions much faster, plus you can speculate on market prices if their rising or falling. 

Consider your markets too. Markets.com offers forex day trading, stocks and shares, indices and a number of other financial instruments for you to choose from. 

Next, outline a day trading plan. Outline exactly what you hope to achieve. Be realistic about any targets you set yourself. Day trading has a steep learning curve. A Marketsx demo account can help you play with day trading without committing any capital but be wary if you expect to make lots of money straight away when live trading with real money. You may be disappointed. 

Your methodology is important here too. Generally, you can base your decisions off two different methods: fundamental or technical analysis. 

If you take a fundamental-led approach, your day trades will mostly be informed by: 

  • Macroeconomic data
  • Company reports
  • Breaking news 

A technical methodology is led by: 

  • Chart patterns 
  • Historic data 
  • Technical indicators 

Managing day trading risk 

Regardless of the products or markets being traded, risk is important to understand for all day trading beginners.  

Stops and limits can be placed on accounts to cease activity when certain negative conditions are met.  

Stock day trading and other types all come with different risk levels, but some day trading principles still apply to nearly everyone. Successful traders know when to cut their losses or spot when their current strategy is not paying off and react accordingly.   

Even the best traders often have low win rates. Sometimes they are below 40%. However, most day traders operate on a target risk-to-reward ratio of 1:2. That means they expect to double the money they are willing to risk. That will be down to you to decide. 

There is nothing wrong with making mistakes. Traders of all levels make them every day. Staying wrong and making a big loss though will probably end your career as a day trader. Be smart and keep monitoring your positions.  

Day trading for beginners can be difficult, but if you keep alert and know when to alter positions you can be successful.  

Should you be watching lithium stocks?

Electric vehicles are looking ever more like the 21st century’s de facto transport mode. As they get ever more popular, so too does demand for their batteries’ key ingredient: lithium. 

Why invest in lithium? 

Speculators and traders are starting to invest in lithium in greater numbers as the number of people buying EVs increases. More than one million plug-in hybrids and pure EVs were sold in Europe in 2020 alone. 

The metal is in higher demand than ever before. Previous sectors, like glass making and medical equipment, are seeing their lithium needs totally outstripped by vehicle manufacturers. In fact, 54% of total lithium use comes from the auto industry. 

To give an indication of the EV boom, Tesla has become one of the most successful stocks in the world. The carmaker’s shares are worth over $600 at the time of writing, and it is gearing up to become one of the largest companies on the S&P 500 with a market cap of in excess of $600bn. 

As well as EVs, the metal has many uses in many different sectors, including: 

  • Glassmaking 
  • Ceramics 
  • Greases 
  • Polymers
  • Air treatment 
  • Metallurgical powders 
  • Primary batteries 

Which lithium stocks should you watch out for? 

As lithium stocks are becoming one of the hottest properties in commodities trading, it pays to know some of the market’s top performers. 

Albermarle  

Albermarle is the world’s largest lithium producer. Headquartered in Charlotte, North Carolina, US, it has operations in Chile, Australia, China and Europe as well as the United States. In 2019, it accounted for 19% of all globally produced lithium. Overall, Albermarle produces roughly 100 lithium-related products. 

Crucially, it has a number of other metallic products in its portfolio, which should help those looking to diversify away from purely lithium mining stocks. These include catalysts and bromines used in metalworking industries.  

It should be noted that lithium, though, remains Albermarle’s key focus and is the highest margin segment of the US firm’s business. 

Galaxy Resources 

With a market cap of $400m, Galaxy resources is keen to expand its current operations. The Australian miner produces the in-demand metal from hard-rock operations in Mount Cattlin, Australia. 

It is also actively developing new mines to cope with automobile’s intense appetite for lithiumthe Sal De Vida Catamarca brine project in Chile and the James Bay hard rock project in Canada. 

Sal De Vida Catamarca is wholly owned by galaxy and is considered one of its premier assets. It holds 1.1m tonnes of retrievable lithium carbonate equivalent (LCE) and 4.9 million tonnes of LCE in Mineral Resources. James Bay is estimated to hold a further 40.8m metric tonnes of minerals. 

Pilbara Minerals 

Australia enjoys substantial mineral wealth and is something of a commodity tradergeographical dream. Many young lithium miners are establishing themselves there, including Pilbara Minerals.  

Founded in 2016, Pilbara wholly owns its chief mineral development project. The Pilgangoora project is a prospective lithium and tantalum developmentA hard-rock project, Pilbara is aiming to eventually produce up to 1.2 million tonnes of spodumene and one million pounds of tantalum per year here. 

Orocobre 

Another Australian firm, this time boasting a market cap of $1.35bn, Orocobre has been in operation since 2005. 

Oricobre is currently developing the Olaroz lithium carbonate project in Argentina. It also owns a 35% stake in Advantage Lithium, which it spun out in return for the sizeable stake back in 2016.  

Advantage Lithium’s primary project is a joint venture developing the Cauchari lithium project, which lies south of Olaroz. Orocobre also produces borates from several other mines and facilities in Argentina. 

Consider a lithium ETF 

A lithium-focussed ETF (exchange traded fund) groups several lithium mining stocks together in one instrument, which can help investors gain exposure to the commodity with potentially lower risk than single stock exposure would. ETFs behave in a similar way to stocks, but they take their value from investing across a group of companies in the same sector. So, instead of putting all your lithium ores in one processor, you can invest in numerous different seams at the same time. 

We offer the Global X Lithium & Battery Tech ETF. It invests in a range of companies that produce lithium or make lithium-based batteries, giving exposure to both the lithium and battery markets. More than 70% of investments in this ETF are in Asian companies. Most of the remaining holdings based in the US. Its top ten holdings, which account for 57% of its overall portfolio, are as follows (as of August 2020): 

Asset  ETF % share 
Albermarle  10.45% 
Tesla  6.67% 
LG Chem  6.63% 
BYD  5.73% 
Gangfeng Lithium  5.60% 
NAURA Technology Group  4.96% 
Contemporary Amperex  4.95% 
Samsung SDI  4.55% 
Sunwoda Electronic  3.76% 
Yunnan Energy New Material  3.62% 

 

All the above should give you some indicators as to why it might be a smart move to invest in lithium as a tradeable asset class. As demand rises, it’s possible that lithium stocks will continue to perform highly. 

What are cyclical stocks?

Whenever a macroeconomic event occurs, the prices of certain groups of stocks are affected. These are called cyclical stocks – something traders of all levels should be aware of. Here’s what they are, and how to trade them. 

A guide to cyclical stocks 

Cyclical stocks are shares in companies that operatin industries greatly affected by macroeconomics and business cycles. These are called cyclical industries. 

These are economic sectors that are susceptible to the economy’s various ups and downs. They are profitable when the economy is performing well, and visa versa. Examples of cyclical industries include automotive, luxury goods, airlines, and holiday firms. 

The price of cyclical shares, therefore, is often high in economic boom times, and low during market downturns. 

We’ve seen the impact of economic downturns on certain sectors during the Covid-19 pandemic. For example, EasyJet shares have been down because no one is going on holiday due to lockdowns. Conversely, stay-at-home stocks, like DIY chains are up because more people are staying at home. 

Cyclical stocks vs defensive stocks 

Defensive stocks are almost like the opposite of cyclicals. Their price is likely to remain relatively unmoved by market fluctuations as the industries represented are less prone to changes in sentiment and the business cycle: consumer staples like Unilever and Procter & Gambletobacco giants like British American Tobacco and Imperial Brands, or utilities such as SSE and United Utilities. 

Defensive stocks tend to generate a steady income stream of dividends irrespective of the state of the overall economy or stock market. For example, drinks brand Diageo might be considered a defensive stock since it generates a steady stream of cash irrespective of the business cycle, but a clothing brand like Burberry would be classified as cyclical.  

What to be aware of when trading cyclical shares 

Volatility 

By their very nature, cyclical stocks are volatile. They are tied in with economic performance, so can fluctuate between highs and lows quite rapidly. As such, they are reasonably well suited to short-term trading, at least in comparison with lower beta or defensive stocks which may not generate as much day-to-day volatility 

You can use products like CFDs and, in the UK, spread bets to trade cyclicals volatility as both allow you to take positions on rising and falling markets. Long-term traders may want to see diversification in their portfolios due to the inherent risk of volatile cyclical shares.  

Beta value & earnings per share 

Beta value is a measure of a stock’s volatility against the market overall. 

A beta of one means a stock’s volatility is equal to the rest of the market. Less than one means the stock is less volatile, so is probably a defensive stock. A beta value of more than one means the stock has a high volatility and is probably cyclical.  

If a cyclical stock has a beta of 1.5, for instance, that would mean for every 10% move in the underlying benchmark, the stock would have moved by 15%. 

Cyclicals’ earnings per share (EPS) can vary wildly too, since their earnings are so dependent on economic health 

The two aspects above are something to consider if you’re considering trading cyclicals. 

Timing 

 Timing is everything when it comes to cyclicals.  

Such discretionary stocks often come in predictable cycles, which means they garner a lot of attention from traders and investors at certain times.  

You can use our analytical tools to help you identify patterns in stock movements. 

A good time to buy cycle-dependant stocks is at “the bottom”, i.e. at the lowest point of that particular cycle. The stock should be at a lower value. Then, you can potentially take advantage of any market upswing. Judging when the bottom is in is the tricky part. 

But remember opening a position at the wrong time could result in significant losses if the market moves against you. 

Consider diversifying your portfolio

Because of cyclical stocks’ volatility, they pose risk to traders. A good way to protect against this and limit your exposure is to build a shares portfolio of both cyclical and defensive stocks. 

During periods of strong economic performance, both your cycle-dependent shares and defensives can earn you a profit. But during downturns, your defensives can potentially offset any losses incurred by your cyclical stocks. 

Diverse portfolios should also include a wide variety of different sectors and asset classes, just as extra protection against market volatility.  

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