What is Trading? 

Trading is the buying and selling of financial instruments such as stocks, bonds, currencies, derivatives, commodities, or indices by speculating on their market price direction. The process is done primarily via online trading platforms provided by brokers. 

Traders use a variety of strategies to analyze the stock market and other asset trends, predict price movements, and execute trades (buying/selling financial assets) at a particular time. The goal of trading financial assets is to capitalize on price changes. 

There are key concepts of trading including: 

• Financial Instruments: These are the markets you can trade on and they include ETFs, forex, cryptocurrencies, stock market, bonds, derivatives, indices, etc. The instruments all hold different assets that can be traded within them. For example, you can trade the Apple company shares via the Stock market and Gold under Commodities. 
• Market Analysis: Traders use various tools and technical analysis strategies to study market trends, identify potential opportunities, and assess risk. 
• Risk Management: Due to the volatility of the financial markets, traders use risk management tools like stop loss and take profits to exit positions when the asset/underlying asset price moves to a predetermined place. 
• Trading Platform: A trading platform provides the tools needed for traders to execute trades, track market data, and analyze their performance. Trading platforms differ based on the broker providing the trading account and offer different features. 

Is Trading the Same as Investing? 

No, trading is not the same as investing. The 2 methods differ in how the asset is traded. With trading, traders speculate on the market price’s future movement and then aim to buy low and sell high (if they predict the price will rise) or sell high and buy low  (if they predict the price will fall) over a short/medium timeframe. 

However, the key factor with trading is that the trader will not gain ownership of the asset being traded as they are simply speculating on its price movement. 

With investing, on the other hand, investors do fundamental analysis to buy an asset at a low price with the hopes that the value of the asset rises in the long run. 

Investors usually focus on the fundamental value of the asset or company (in the case of the stock market) and seek to hold their position for extended periods, typically years or even decades. Investors also buy the primary asset and do not just trade the price movement of the underlying asset as it is with trading.

Feature 

Trading 

Investing 

Timeframe 

Short-term (days or weeks)

Long-term (years or decades)

Focus 

Market Price Fluctuations 

Fundamental Value of the Asset

Strategy 

Primarily technical analysis

Fundamental analysis 

Risk Tolerance 

High

Low

How Does Trading Work? 

Trading the financial markets involves speculation of the asset’s price direction. Traders benefit when the price of the underlying asset moves in the same direction as their speculation. However, if the asset price moves in the opposite direction of their speculation they incur losses. 

In addition, financial trading, like any other marketplace, works with supply and demand. When there are more sellers than buyers for a particular asset (say Bitcoin), supply is greater and the price goes down. If there are more buyers than sellers for a particular asset, supply is reduced and the price goes up. 

To trade, traders can only get exposure to financial assets via a broker (intermediary) or directly from an exchange. When using an exchange trading happens right on the order book with no middleman. But with a broker, a dealer network or middleman reaches an agreement with the trader on the price to buy and sell an asset. 

Example of How Trading Works

Say Tesla shares are currently trading at $51.615 with a buy price of $51.631 and a sell price of 51.601. The trader anticipates that the asset on the stock market is going to rise in value in the next few hours/days, and buys 150 share CFDs at $51.631

If Tesla’s share price does rise and trades at $53.616 with a new buy price of $53.640 and sell price of $53.607, the trader would close their position by reversing the original trade, selling 150 share CFDs at $53.607.

To calculate the outcome of the trade, you’d multiply the difference between the closing price and opening price of the trade by its size. In our example, the outcome would be $305 (53.640 - 51.601) x 150. This excludes any extra cost. 

That said, if the Tesla share price decreased to $50.515 with a buy price of $50.530 and sell price of $50.500 and the trader closed their position by selling the shares at the current share price, they’d make a loss.

To calculate the loss incurred, you multiply the difference between the closing price and the opening price of the trade by its size. In our example, the loss incurred would be ($169 (51.631 - 50.500) x 150 Tesla share CFDs. This excludes any additional cost. 

Types of Tradable Financial Assets

There are lots of tradable assets in the financial markets. These assets can be grouped into different categories. Below are some of the types of Tradable assets. 

Stocks and Equities 

A stock is a share of ownership in a company while an equity is the total value of a company's shares. Shares of ownership are issued by publicly traded companies. 

Stocks are traded on stock exchanges like NASDAQ and NYSE. There are 2 major types of stocks: Common stock and Preferred stock. Stocks are also often divided by their market capitalization into small-cap, mid-cap, and large-cap stocks. 

Bonds 

Bonds represent a loan to a borrower typically a government or corporation. When you buy a bond, you are lending money to the issuer in exchange for regular interest payment and the return of your principal investment at a later date. 

Bonds are often traded on the secondary market. They can also be traded through a brokerage firm. 

There are different types of bonds: Treasury bonds, Municipal Bonds, and Corporate Bonds. 

• Treasury Bonds: Issued by the government
• Corporate Bonds: Issued by corporations
• Municipal Bonds: Issued by state and local governments and are often exempt from federal income tax

Treasury and Municipal Bonds are considered low-risk while corporate bonds have increased risk and carry higher rates. 

Derivatives 

Derivatives are financial instruments that derive their worth from the value of an underlying asset. This underlying asset can be any financial product like a commodity, stock, cryptocurrency, or indices. 

There are 3 major types of derivatives: Futures, Options, and Swaps. 

Derivative futures are contracts that are traded at a predetermined price on a future date. Options, on the other hand, give the holder the right to trade an underlying asset at a specific price within a set timeframe. Finally, Swaps are agreements to exchange one type of financial asset or cash flow for another. 

Commodities 

Commodities are raw materials or primary agricultural products that can be traded. 

Are grouped into agricultural, metals, and energy commodities. Common examples of tradable commodities include cattle, hog, gold, palladium, silver, platinum, oil, natural gas, milk, soya bean, Sugarcane, etc. 

Foreign Exchange and Currencies 

Foreign Exchange (Forex) entails the trading of one currency for another. The forex market is large and liquid. It comprises both individual and institutional traders. 

Currencies are traded in pairs in the forex market. There are hundreds of currency pairs in the market, including popular pairs like Euro/US Dollar, British Pound/Japanese Yen, New Zealand Dollar/US Dollar, British Pound/US Dollar, Australian Dollar/US Dollar, US Dollar/Canadian Dollar, etc. 

Factors that Affect Trading Outcome

The markets are volatile and are susceptible to constant price fluctuations, which can affect the outcome of trades. However, this is caused by several underlying factors that influence the movement of the market. Below are some of these factors:

Economic Indicators 

Several economic indicators can affect the movement of the market and ultimately affect trading. Aside from the overall economic health and growth of a country, factors like inflation, interest rates, and labor market conditions can affect the financial market. 

A company's profitability, Debt-to-Equity Ratio, total income, and even leadership changes can affect the stocks and other assets. 

Geopolitical Events 

Geopolitical events such as international trade agreements between 2 countries can influence the market dynamics. Also, wars, conflict, and political instability as a result of changes in government or policies can affect the financial market. In most cases, conflicts or negative events can cause a downturn in market movements while positive political and economic events can result in positive market movements. 

Trader Emotion

This is a major internal factor that affects the outcome of the trade. This has to do with the trader's approach to trading. A trader's optimistic or pessimistic approach to trading can affect their results. Likewise, emotions like fear, greed, and herd behavior can adversely affect the outcome of trades.

This is why having a trading plan and emotional discipline is important in trading. This coupled with the appropriate risk management strategies can yield positive trading outcomes. 

Trading Plan and Risk Management 

Having a trading plan is vital to the success of trades and can greatly influence the outcome of a trade. A trading plan acts as a roadmap and helps traders not to make impulsive decisions. 

Risk management strategies are also important in navigating the volatile financial markets. 

Traders who stick to their trading plan and implement the appropriate risk management tools like stop loss/take profits often tend to have better trade outcomes than those who do not. 

How Do I Begin Trading?

Getting Started with Trading is quite simple. In most cases, all you need is access to the Internet, trading capital, and the right trading platform. 

Below is a breakdown of how to get started with trading: 

Educate Yourself 

This is the first and most important step. Before you begin trading, you need to first educate yourself on the fundamentals of the financial market and familiarize yourself with the different types of tradable assets. This will help you make an informed decision on which asset fits your investment goals. Appropriate education and information will also help you to easily navigate the market.

Choose A Broker

The broker you choose plays an important role in the success of your trades. It is important to choose a broker with competitive fees, excellent customer support, a user-friendly interface, and a vast selection of tools and resources. 

It is also best you choose a broker that specializes in the asset class you wish to trade. 

Once you find the perfect broker for you, the next step is to open an account and fund your trading account. 

Practice With A Demo Account 

Before trading on the live market, you should practice with a Demo account. This will help you to get acquainted with the trading platform and test your trading strategies before trading with real money. 

Develop A Trading Plan 

A trading plan gives a structured approach to your trading activities. 

It also helps you to outline your goals, set your trading budget, and outline the strategies required to achieve the set goals. 

It is not just enough to have a trading plan, it is also important to develop the discipline to adhere to the plan regardless of how the market moves. This is why a demo account is needed to help you practice the discipline to stick to your plan. 

Develop Risk Management Strategies 

Risk management strategies are crucial in ensuring that you do not lose your entire trading capital. With the appropriate strategies, you will be able to navigate the volatile market without blowing your account. Common risk management strategies you can implement include position sizing, stop loss, take profit, etc. 

Start Small and Gradually Increase 

When just starting with trading, it isn’t recommended to trade with your entire capital as a single bad trade can blow your trading capital. It is best to start small by entering trades with only a portion of your capital. This reduces the effect of losses and helps you gradually accumulate returns. 

You can gradually increase your trading capital as you gain mastery of your strategy and the market. 

Conclusion 

Trading the markets involves speculation on the price direction of the assets being traded. It isn’t the same as investing where the investor opens long-term positions based on the fundamental value of the asset but rather deals with the price fluctuations of an underlying asset. 

Remember, financial trading works like any other marketplace (based on supply and demand). If more people buy the price rises, if more people sell the price drops. Also, take into consideration factors like geopolitical news events, economic indicators, etc. that can affect the price of assets. 

Note, trading is inherently risky and traders can lose their entire capital when their speculations are wrong. 

FAQ

How do you Explain Trading to a Beginner?

The buying and selling of financial assets (shares, stocks, cryptocurrencies, commodities, etc) without owning them in the hopes of benefitting, if the price moves in the direction of your speculation. 

What is the Concept of Trading?

The concept of trading is the speculation of the price of a financial asset.

How do you make money from Trading?

You make money from trading when you make correct speculation on the direction of an asset’s price. 

What Can You Trade On?

You can trade on any financial market like the stock market, forex market, indices, derivatives market, cryptocurrency market, etc via a broker.