What is trading and how does it work?

What is trading?

Trading is the buying and selling of financial instruments in order to make a profit. These instruments range from a variety of assets that are assigned a financial value that can go up or down – and you can trade on the direction they’ll take.

You may have heard about stocks, shares and funds. But there are thousands of financial markets you can trade on, and a variety of products you can use to trade them.

You can get exposure to markets as diverse as the FTSE 100 or S&P 500, global currencies like the euro or British pound, or even commodities like lean hog or cattle.

To get started, you’d need to create an account on a platform that offers your preferred markets. Our online trading platform has a variety of financial markets that enable you to speculate whether the price of an asset will rise or fall. Plus, we’ve compiled a trading for beginner’s guide below to assist you in getting familiar with the different markets.

Trading vs investing

The difference between trading and investing lies in the means of making a profit and whether you take ownership of the asset. Traders make profits from buying low and selling high (going long) or selling high and buying low (going short), usually over the short or medium term.

Since the trader would only be speculating on the market price’s future movement, be it bullish or bearish, they wouldn’t gain ownership of the underlying asset.

Investors aim to buy the underlying outright at a favourable price. They make profits from owning the asset, and then selling it at a higher price.

The hope is that the market price rises over the long term so that they can profit through difference in price.

Investors could also earn income in the form of dividends (in the case of stocks) if the company grants them. Plus, they’ll have shareholder voting rights (if eligible).

Who trades and who invests?

Traders are those who’d prefer to make use of leverage and derivatives to go long or short on various markets.

Individuals (called retail traders), institutions and governments participate in financial markets by buying and selling assets with the aim of making a profit.

Some financial traders stick to a particular instrument or asset class, while others have more diverse portfolios. Governments and institutions can adapt at a much faster pace, as they often have departments that focus on trading different sectors and industries. Institutions remain the biggest participants in the market, with about 77% of trades attributed to them.

For individuals to invest on the stock exchange, they must go through a stockbroker that will execute the order. They’ll do their due diligence, research before placing a trade, read charts, study trends; and the broker will act on their behalf. Retail traders take positions from their own private accounts, which they fund – they bear the full risk of losing their capital.

Institutions that trade include commercial banks, hedge funds, and corporations that have an influence on the liquidity and volatility of stocks in the market. This is because they typically engage in block trades, which comprises of buying or selling at least 10,000 shares or more at a time.1

These entities stand to profit from supply and demand of goods or products, political instability, the availability of currency (including the movement of interest rates), and many other factors.

How does trading work?

When you trade, you profit if the market price moves in the same direction as your speculation; however, if it takes the opposite direction, you incur a loss.

The basic premise to remember is supply and demand. When there are more buyers than sellers in the market, demand is greater, and the price goes up. If there are more sellers than buyers in the market, demand is reduced, and the price goes down.

Getting exposure to assets can only be carried out over the counter (OTC) or directly on an exchange.

Trading OTC involves two parties (trader and broker) reaching an agreement on the price to buy and sell an asset. Whereas a centralised exchange is a highly organised marketplace where you can trade a specific type of instrument directly.

ETPs, like turbo warrants, are traded on an exchange while you’d use spread bets, CFDs or barrier and vanilla options to get exposure OTC.

How to start trading

To get started, you have to research the trading instrument that you’ll use to get exposure. With us, you can choose ETPs such as Turbo24 to track your position day to day and intraday.

CFDs are also popular trading vehicles that enable traders to get exposure to underlying assets through leverage. With CFDs, you’ll enter into a contract to exchange the difference in price between opening the contract and closing it.

You can also take a position using barriers and vanilla options where you’ll buy contracts that enable you to speculate on the future value of a market, giving you the right – but not the obligation – to trade the market at a set price on or before a set date.

Here are the steps you’ll need to take to start trading on our platform:

1. Create your trading account

With us, you can create a live or demo trading account. It’s important to note that you'll only make a profit if your prediction is correct - if it isn’t, you'll incur a loss. Additionally, the exact amount – be it a profit or a loss – is based on the difference between the opening and the closing price.

Some traders prefer options because various strategies can be employed to limit risk and exposure is non-linear, with more ways to potentially profit. The time value, also called theta, of an option also decays in a non-linear manner.