Building a Trading Platform – Part 1: Introduction

Building a Trading Platform – Part 1: Introduction

No matter which career path You choose, you will ultimately be confronted with the question of how to make the most out of Your hard earned savings. Be it to prepare for retirement on a tropical island, to buy Your dream house or simply because...

No matter which career path You choose, you will ultimately be confronted with the question of how to make the most out of Your hard earned savings. Be it to prepare for retirement on a tropical island, to buy Your dream house or simply because You are genuinely curious about the world of investing and making money. Either way, at some point you will need to start examining Your options. A quick calculation shows, that in the early stages of investment, a linear approach by simply saving a chunk of Your salary, will result in a quicker gain in capital than trying to focus on a high return on investment right from the beginning. For example: When having $10,000 in savings, adding another $10,000 annually from Your salary will be a 100% growth in capital, while 10% interest would just be $1,000 a year. Hence the higher the salary, the faster the build-up of that initial investment amount. Your initial investment should therefore be in a solid education and finding profitable employment. Once that is done and a certain amount has been reached however, the interest on Your capital will take an ever greater share of the savings and it becomes increasingly important how those savings will be invested, rather than how much money can be saved every month. After all, with $100,000 in savings, adding $10,000 from Your salary will now be only 10% growth, while a 10% interest will now equally result in a $10,000 increase in capital even without savings from Your salary. In fact, at a 10% interest rate and a savings rate of $10,000 per year, the point where the income from interest surpasses Your savings rate will be after approximately 8 years. That is where you want to start focusing more on investment and less on savings. The graph below visualises this:

Of course, investing early is always a great idea. But your main focus should initially remain on increasing Your savings rate, to account for the mathematical basis, until Your income from interest will reaches a relevant level.

Where can I obtain an attractive return on investment on my capital?

There are many investment options, the most obvious ones being Savings Accounts, Bonds, ETFs, Funds, Stocks and Commodities. What it eventually comes down to, are two kinds of investments: Either a participation in equity or in foreign capital*. A bond is a classic foreign capital investment, whereas stocks let You participate in the equity of a corporation.

It is important to understand the differences between the various forms of capital investments and how they influence the outcome and risk profile of any given strategy. At the same time, other factors such as trading costs and taxation significantly impact the performance of certain investment approaches, which may affect the optimal choice for each investor. Last but not least, the actual investment object needs to be analyzed. Typical evaluation factors here could be things like its cash-flow, equity growths or debt levels.

When You approach Your bank or investment advisor to take care of your situation, you immediately enter a relationship that is based on a conflict of interest. While Your goal is to maximize Your returns while keeping costs low, your investment advisors main goal inherently must be the maximization of Your costs for him to earn a living. In the best case, he will recommend you an ETF, which will involve low costs and give You returns around the market average.

Finding Alpha

Ideally, You will be able to combine low costs with an above market rate of return, better known as Alpha. Generating a return on equity that is above the market average is what allows the generation of wealth. Finding those above average returns is hard and a strategy that works today, might well be obsolete tomorrow. Building a strategy requires thousands of computations, which most people do not have the time nor interest for.

Hence the idea for a trading platform. In several stages, it will allow users to create scenarios and setups that can be tested based on historical data, while taking things like trading costs into account, to get a realistic picture of how profitable a strategy is. The development of this system involves a mountain of work. The next articles will therefore examine how to break down the idea into smaller chunks, explore the tools that will enable the implementation of the concept and the architecture upon which the platform should be built.

*There are, of course, derivative financial products that emulate a participation in both. At the end of the day, these products are still a bet against the issuer of the derivative, putting the capital of the investment in the liability section of the issuers balance sheet, meaning the product is still a foreign capital investment with the corresponding implication for the counterparty risk of the investment.

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