What Is Trading & How Does It Work?
Trading the market essentially involves buying and selling financial instruments with the goal of generating profit. In this guide, we talk about the key components of the financial markets and explain how to execute trades. You’ll learn the basics of trading including topics such as risk/reward and expand your knowledge to help you spot potential opportunities in the market.
What is trading?
Understanding what trading means is fundamental to financial success. Financial trading involves buying and selling securities, assets, or financial instruments to generate profit. Trading involves buying and selling these instruments when their values fluctuate based on various market factors and economic conditions.
Trading allows speculation on market movements and price direction, so depending on the product you’ve chosen to trade with, you could make a profit from falling prices as well as rising prices.
There is a huge range of markets available to choose from as well as an array of products that can be used to trade them.
Is trading the same as investing?
The key difference between trading and investing lies in timeframe and approach, with traders seeking short-term profits while investors focus on long-term growth.
Trading the market usually means buying and selling in the short term to make gains on rapid rises and falls in the value of an asset. Traders enter and exit positions in a matter of days, hours or even minutes.
Day traders, who buy or sell within a single trading day, represent the most active segment of short-term market participants. Swing trading extends this timeframe to several days or weeks, capturing medium-term price swings between support and resistance levels.
Position trading involves holding trades for months, blending active trading with long-term investment approaches. Long-term trading strategies require patience but can reduce the stress of constant market monitoring. Learning to day trade requires understanding intraday price movements and managing positions within market hours.
Investors, on the other hand, look to profit over a longer time period and, with this approach, it's common to hold assets for a number of years before selling.
Due to the nature of trading, those looking to take advantage of the markets this way will usually profit by smaller amounts, but on a more regular basis - if, of course, they're successful. Investors, by contrast, could see larger gains but will normally need to wait much longer to benefit.
Which method is riskier?
While this is a matter of subjective opinion, it's often assumed that trading is the riskier option due to potential market volatility, market fluctuations and unpredictability. Investing can also be considered a risk but, as it involves holding assets for a greater length of time, investors are unlikely to suffer from the shorter-term dips that occur frequently within the market.
It's important to understand that financial trading does take a degree of skill and expertise, especially when applying strategies such as technical and fundamental analysis. Effective market analysis combines both technical chart patterns and fundamental economic factors.
What are financial markets?
A financial market facilitates buying and selling financial securities, providing platforms where traders enter and exit positions electronically or physically.
These markets, or exchanges, can be thought of as platforms, of which there are a large number, each associated with different types of assets.
Examples of financial markets include the stock market, forex market and commodities market. The New York Stock Exchange (NYSE) and London Stock Exchange are well-known markets which also have physical buildings, where the buying and selling of financial securities, particularly company stocks, takes place. Nowadays however, most traders use online trading platforms to execute their positions, with advanced trading platform features enabling real-time market access.
Trading via regulated exchanges is the most common method but it's also possible to trade over the counter (OTC). This refers to trades via a broker-dealer network as opposed to on a centralized exchange like the New York Stock Exchange. Online trading has revolutionised market access, allowing retail traders to participate in global markets from anywhere. Modern financial services have made trading more accessible and affordable than ever before.
What assets can be traded?
Multiple assets like stocks, forex, and commodities are available to trade, with Tradu offering thousands across various classes:
- Stocks: Trading that takes place on the stock market refers to company stock, listed as shares on exchanges. Stocks can be categorised as common or preferred stock as well as listed as other classes such as large, mid or small cap, or domestic or international. Stocks can be traded via multiple strategies through a broker on an online platform. Individual investors can buy and sell stocks using various strategies through brokers on online platforms, accessing thousands of listed companies. Success depends on accurately predicting stock prices and timing entry and exit points effectively.
- Forex: Also knows as foreign exchange, the forex market is where currency is traded and is the most liquid market in the world. Currency trading takes place in pairs, where they're traded against one another. You can learn more in our guide to currency pairs.
- Commodities: Trading natural, raw or mined products is categorised as commodity trading. Like stocks, these assets are mainly traded on exchanges such as the New York Mercantile Exchange (NYMEX) and London Metal Exchange (LME). Future contracts on commodities allow traders to speculate on price movements without owning the physical assets.
- Indices: These are financial assets specifically created to measure the performance of asset groups such as stocks and commodities. Examples include the FTSE 100, which lists the top 100 companies with the highest market capitalisation, and the Dow Jones Industrial Average, featuring 30 blue-chip companies.
- ETFs: Exchange-traded funds combine diversification benefits of mutual funds with the tradability of individual stocks, tracking various indices, sectors, or commodities.
What are the different ways to trade?
The most common way of trading the market is via CFDs. CFDs are types of financial derivatives that allow you to speculate on the price movement of an asset without having to actually own it.
CFDs (contract for difference) state that the difference in price between the start and end of a trade will be exchanged.
With CFDs, you can speculate on either a rise or fall of the market, because the trade is based on the underlying value, rather than having to trade the actual asset. Profits depend on correctly predicting whether the market price will rise or fall from your entry point.
Leverage
It's also common for traders to use leverage with this type of financial trading, so it's possible to input a smaller deposit to gain exposure to larger capital. However, while this can magnify potential profit, it can also increase loss in the same way so it's vital to assess the risks and ensure that you employ any risk-management strategies.
With CFDs, the aim is to make a profit and that's ultimately determined by the actual direction of price movement.
When can trades take place?
Financial trading generally has set times, depending on the market in which you want to trade.
- Stock market: The trading hours of the stock market in the UK are 8am until 4.30pm, with a two-minute break at 12pm, Monday to Friday. Other locations vary so it's important to check if you're trading on international exchanges.
- Forex market: The foreign exchange market is open 24 hours, five days a week, to account for different time zones and currencies. With Tradu, you can trade forex from 5pm ET on Sunday to 5pm ET on Friday.
- Commodity market: Most markets in this asset class are available to trade Monday to Friday, 24 hours a day.
- Indices market: Like the stock market, trading hours across these markets are location dependent with each country's exchange opening and closing at hours relevant to the time zone.
Key considerations when trading
Trading is inherently risky and some markets can be more volatile than others. Whether you're a beginner or an experienced trader with bags of experience, there are some key aspects to consider when executing any trade:
- Research: Whatever market you're trading, it's important to research every aspect before entering a position. Learn about the different assets, their historical value, and how well they've performed previously in various market conditions. Access to real-time market data and comprehensive resources helps build essential trading knowledge. Analysing market trends helps identify profitable opportunities and avoid potential losses during volatile periods.
- Factors that affect the market: Each market and asset will be influenced by a range of factors that affect the value and direction. Developing a thorough understanding of market factors affecting each asset helps ensure trading success.
- Strategies: Every savvy trader should develop effective trading strategies, as these systematic approaches help identify opportunities and manage risk. Your trading approach should align with your risk tolerance, available time, and market knowledge. Each trader must develop their own trading style based on personality, schedule, and financial goals. Not only can they help you to spot opportunities but they enable you to place considered positions and can increase your chances of making a profit. It's crucial for any experienced trader to stick to their strategy, as veering off course is what often leads to greater loss. Successful trading requires discipline, consistent strategy application, and continuous market education.
- Risk management: While it's vital that you never trade more than you can afford to lose, any experienced investor in the world of financial trading should take further steps to manage risk. Before taking any position, consider the value, assess your risk and implement risk management tools such as a stop-loss order to automatically limit potential losses.
- Continue learning: Even the most expert traders continue to learn from their successful and unsuccessful trades. Evaluate what did and did not work after each trade and revisit your strategy at regular intervals to make sure that it's still the best one for you. Finding the right strategy often requires testing different approaches and adapting to your evolving experience.
How to start trading with Tradu
Now that you know what financial trading is and how it works, why not go ahead and begin trading the markets with Tradu?
Whether your level of experience, it's easy to get started:
- Open a trading account: Sign up for a live Tradu account in minutes.
- Use our resources to get learning: Our market, trading and platform guides can help to build your knowledge and give you the confidence to start trading. Our comprehensive trading resources for beginners ensure you understand fundamentals before risking capital. Taking time to learn to trade properly can save costly mistakes and improve long-term profitability.
- Choose your market: Pick from thousands of assets to trade with Tradu.
- Develop a strategy: Create a plan based on your chosen market and harness your newly learned skills in fundamental and technical analysis.
- Execute your trade: Our super-slick platform makes it easy to spot opportunities with real-time updates and advanced features.
- Diversify your portfolio: Once you've got to grips with your chosen market, why not extend your trades to a range of other assets? With your Tradu account it's easy to trade listed stocks and CFDs on stocks, forex, indices and commodities.
Take a look at our other guides for further tips on how to trade: