What Is Trading?

Simply put, trading refers to the act of buying or selling financial assets and markets as well as derivatives with the hope of making a profit. A derivative is a tradeable product or contract between 2 or more parties that get their value from financial assets or markets.

The History of Trading

Trading arguably dates back to prehistoric times, with some accounts tracing it to ancient Mesopotamia in 2260 B.C., where humans engaged in the exchange of goods.

However, modern-day trading, as we know it today, and the inception of the first-ever stock exchange can be traced back to the Amsterdam Stock Exchange in 1602.

The Importance of Trading

Trading holds significance not just for traders but plays a vital role in the broader global economy, influencing the labor market by generating job opportunities and impacting economic well-being and global investments. Additionally, it enhances a country's efficiency, fosters foreign direct investments (FDI), and contributes to the growth of various business sectors.

How Does Trading Work?

There are many different types of trading and each one works differently, but overall there’s an overarching explanation of how trading works. Broadly speaking, when trading, the trader opens a trading account with a broker or a trading platform in order to trade certain assets like Forex, Indices, Stocks, or derivatives.

Once the position is closed, if the prices of the asset or derivative align with the trader’s positions, then he or she will gain. Conversely, if the prices of the underlying asset do not align with the traders' positions, then he or she will lose.

Types of Trades - What Assets and Markets Can You Trade?

Depending on the regulation and the jurisdictions, multiple markets and assets can be traded. Here are the main ones:

• Crypto: Cryptocurrency trading involves speculating on price movements via a CFD trading account, or buying and selling the underlying coins via an exchange. Here you'll find more information about cryptocurrency trading, how it works and what moves the markets.
• Forex: This is the foreign exchange market where currencies are bought and sold (exchanged) based on exchange rates. Examples of Forex pairs include EUR/USD, USD/JPY, and GBP/USD.
• Commodities: This refers to the products or raw materials and goods that are traded. Commodities can range from agricultural like cattle or wheat to energy like oil and natural gas and metals like copper and gold.
• Indices: Indices or indexes are measures of a security or a basket of securities and financial instruments’ prices. Famous examples of indices include the S&P 500, Dow Jones Industrial Average, and the Nasdaq.
• Stocks: Stocks or equities are financial assets that represent a portion of ownership in a company. Stock trading can range from tech to energy sectors and retailers to pharma and aviation.
• ETFs: These are pooled investments that track assets like stocks, indices, bonds, commodities, and currencies. Some examples of ETFs include the SPDR S&P and the iShares Silver.
• Options: Options are derivatives and they grant traders the option to buy or sell the financial asset or market at a predetermined time and price in the future.

 

Who Can Be a Trader?

To be a successful trader, one needs to possess the following traits (among others):

• The ability to buy or sell financial instruments.
• Mastery of risk mitigation through the use of risk management tools and trading techniques.
• The ability to conduct both quantitative and qualitative assessments. Strong analytical thinking skills.
• The ability to manage one's emotions effectively.

 

What Does a Trader Do?

Essentially, a trader aims to buy low and sell high to profit from the asset’s or derivative’s price. To achieve this, traders can employ various strategies, such as fundamental analysis or technical analysis, which involve studying an asset’s or derivative’s price charts or intrinsic value to assess whether it may rise or fall.

They then adjust their positions accordingly. Furthermore, traders can consider analyses, news and market events to inform their next moves.

It's also advisable for traders to use risk management tools like stop loss and techniques like hedging to protect themselves from adverse price swings, given the markets' known volatility.