At first glance, trading can be overwhelming. There may be a lot of new words that you’ve never heard before and what seems like endless numbers and graphs. Learning the ropes of any new venture takes a little time when you’re just getting started, so we’ll help you learn the basics of trading today.
What is financial trading?
Trading is the buying and selling of financial instruments. They can be categorized as:
- Foreign exchange (forex)
- Company shares
- Stock market indices
These financial instruments are used in the real world by businesses and people every day.
For example, when someone travels to Europe, they need to buy euros to pay for things when they are there. When exchanging their local currency for euros, they are actively participating in the forex market. Large international companies do this as well. US companies that make money selling their goods and services worldwide will have to convert some of their earnings to US dollars to pay salaries and taxes.
Another real-world example is a computer manufacturing company needing a steady supply of gold and silver in order to create intricate computer parts. When the company orders the precious metals, it is actively participating in the commodities market.
Traders, on the other hand, are simply looking for ways to take advantage of the changes in price. The main idea is to buy low and sell high.
One popular way of trading online is using CFDs, or contracts-for-difference. A CFD is a financial contract that pays the difference between the opening price and the closing price of a trade. Even though they represent the value of the underlying asset, there is no delivery of physical goods or securities when trading CFDs. They can be stocks, indices, commodities, forex and cryptocurrencies, and are traded through a platform on your computer or cellphone.
What are the financial markets?
A financial market is a place where buyers and sellers come to trade. The term “market” is used loosely and can mean any of the financial markets. With the evolution of online trading, you can now trade different instruments from the comfort of your home. Through an online broker you can get access to instruments (as CFDs) which are traded around the world. Modern brokers offer simple access with low initial funding costs so the time to get into trading has never been better.
Why trade at all?
Inflation is a process which has been eating away the world’s monetary value by an average of 2% to 12% per year since 1985. After a year, your money does not hold the same value — it is worth at least 2% less. Some people use their money to buy financial instruments, like CFDs.
Trading is about balancing inherent risk with potential reward. You want to pick instruments that are more likely to move in the direction you are forecasting. If you do proper research and trade smartly the rewards of trading might surprise you.