Trading, in formal terms, is the process of buying and selling financial instruments. The goal, for most traders at least, is to earn money by repeating this process over time. They do this by correctly predicting whether the asset they are speculating on will rise or fall in value.
However, for someone entirely unacquainted with the world of trading, this explanation may not suffice. If that’s you, or you just want a quick refresher, this text will have what you’re looking for. We’ll go over the what, why, and how, and give some general guidelines for those just getting into trading.
What can you trade?
Let’s start with the what. We’ve mentioned that trading involves financial instruments, but for someone not in the know, that description is unhelpful. So, what is a financial instrument?
To give another somewhat unhelpful explanation before we simplify things, a financial instrument (sometimes called an asset, trading instrument, or trading/financial product) is anything you can buy and sell in financial markets. Essentially, it can be almost anything, from everyday supplies like wheat to digital currencies like Bitcoin. However, these instruments are often grouped into categories based on some shared qualities. Let’s look at the five most prominent categories:
الفوركس
Forex (short for foreign exchange) is the world’s most active market. In fact, without even knowing it, you’ve likely participated in it. It’s where we exchange currencies for one another.
So when you trade forex, you speculate on which currency will rise in value and which will fall. Forex is traded in pairs, and the most common one you’ll see is EUR/USD. The unique thing about this kind of financial asset is that it measures the value of one currency against the other (in our example, the euro against the US dollar).
The value of any pair rises when the first part becomes stronger relative to the second. For the EUR/USD currency pair, that may mean that the euro has remained the same, while the dollar decreased in value, making the euro stronger in comparison.
الأسهم
When you see a trader or investor depicted in the media, they are most likely a stock trader. As such, this type of trading feels the most familiar to a lot of people. In the stock market, people speculate on the prices of shares from certain companies. Here, you’ll see entities that have become household names like Amazon, Google, or Netflix. As a rule of thumb, the better the company performs, the more their stocks rise in value.
المؤشرات
Indices (plural of index) are stocks neatly grouped into bundles so that traders can speculate on entire market segments instead of a single company. For instance, the Nasdaq Composite is one of the US’ biggest indices, and it’s a collection of shares that mostly come from IT companies.
If a trader thinks the entire US tech sector is doing well, they may opt to trade Nasdaq instead of, for instance, Nvidia. In general, Indices are considered very stable, since they are less likely to move in large swings than a single company.
السلع
Commodities are what the average person has most contact with. They are everyday goods, some of which (like petrol) we use on an everyday basis. There are three major commodity subcategories:
- Metals (silver, gold, platinum)
- Energies (brent, crude oil, gas)
- Agriculture (wheat, coffee, cattle)
Traders also generally consider these safe, since they have use outside of financial markets. In poor market conditions, people will want to brew coffee, but they may not want to buy 3 shares of Meta.
Cryptocurrencies
The latest craze in financial markets are cryptocurrencies, which are money that’s entirely digital. A cryptocurrency runs on blockchain technology, which, not to get into the technical details, verifies when new crypto is proverbially printed. In practice, tech enthusiasts have created many more uses for crypto and adjacent products like NFTs based on the same technology.
Getting into the details of how crypto works is beyond this text, and it’s more of a technology thing than a finance thing. However, some of the more popular cryptocurrencies are Bitcoin, Ethereum, Tether, and XRP. As a new market that often sees changes in regulation, laws, and other surrounding factors, crypto is very volatile.
Why would you trade?
Our next question is why someone would even consider trading. Luckily, this one requires a much shorter explanation than the previous one. People trade to earn money.
The exact reason a person starts to trade is highly individual. Perhaps someone simply wants an extra income stream, another trader may want to bolster their retirement fund. For some, it’s a matter of excitement, for others a matter of reaching a financial goal, like buying a house.
Whatever the reason is, and whether you want to do it quickly or over multiple years, the goal of a trader is to profit from markets.
How to trade?
For retail, everyday traders or investors, the most accessible way to trade is through a broker. When thinking of a broker, your imagination may jump to a person in a nice suit, sitting in an office on Wall Street, in front of a computer with multiple screens with data that’s indecipherable (at least to us regular people). That’s not what we’re talking about.
The easiest way for traders today to access the market is through online brokers like Xlence. These brokers let you access markets from the comfort of your own home (or anywhere else you might find yourself) through software called trading platforms. These platforms let you see market information and perform actions like buying or selling an asset. They are commonly available as terminals (to download on your computer), web platforms (for computer browsers), and mobile apps.
Trading vs investing differences
The difference between trading and investing is that trading often refers to strategies where you aim to profit in the short term, like scalping or day trading, and investing refers to long-term, buy-and-hold tactics. Similarly, when people distinguish traders and investors, they consider the time frame in which they intend to profit.
However, this is by no means set in stone. In fact, the two terms are entirely interchangeable, and most people employ a mix of these two strategies. So, once you open a platform and buy your first financial instrument, feel free to call yourself a trader, investor, financial professional, or any fourth thing you like the sound of. At the end of the day, these are just labels people use to simplify things for themselves.
What are CFDs in trading?
Before we sign off, we feel that it’s important to introduce you to the concept of CFD trading. Outside the US, this is the easiest (and sometimes the only) way for people to access prominent global markets.
In traditional trading, you’d buy a share of a company and own it. If you buy enough, you may end up on a company’s board, or become a significant shareholder. However, most countries won’t let you easily buy stocks on exchanges abroad.
CFDs work differently, they are a contract that you can buy from a broker, and that later allows you to sell it for the price of the asset it’s connected to. So, if Amazon stock is worth $100 today, you can purchase an Amazon CFD for $100, and if it jumps to $120 tomorrow, you can sell the contract for $120. In this process, you haven’t actually purchased any stock from the company.
If this sounds confusing, you don’t need to worry about the details. What’s important to remember is that CFDs are an alternative to traditional trading that allows traders across the world much more agency over the assets they can buy and sell.
Quick refresher and final considerations
Hopefully, you’ll walk away from this text with a better idea of what trading in financial markets means. Here are some key points that you can use to jog your memory:
- Trading is the process of buying and selling financial instruments to make money.
- Traders make money by correctly predicting whether their financial instrument will appreciate or depreciate in value.
- Financial instruments are grouped into forex, stocks, indices, commodities, and crypto.
- Anyone can access financial markets through an online broker like Xlence.
- CFDs are the easiest way for most people outside of the US to access popular assets such as stocks from top global companies.
If this text has interested you in stepping into trading waters, consider exploring our blog, where we cover other important trading topics and concepts. We wish you the best of luck!
Disclaimer:This information is not considered investment advice or an investment recommendation, but instead a marketing communication.