What is Trading? Financial Trading and How It Works

Trading the market is essentially the buying and selling of assets or financial instruments with the goal of making a profit. Discover the range of markets available and how to execute trades in our guide.

Understanding the intricacies of financial trading and how it works is key to assessing risk/reward ratios and executing trades with confidence. Learn the basics and expand your knowledge to help you to spot the right opportunities.

What is trading?

What are financial markets?
What assets can be traded?
What are the different ways to trade?

Leverage

When can trades take place?
Key considerations when trading
How to start trading with Tradu

What is trading?

Financial trading refers to buying and/or selling assets, ideally to make a profit. Each asset, or financial instrument, has a certain value at any given time, which can rise or fall depending on a variety of factors.

Trading the market is unique in the sense that some products allow you to speculate on the price movement or market direction so, depending on the product chosen to place a trade, you could make a profit from falls as well as rises.

There is a huge range of markets available as well as an array of products that can be used to trade them.

Is trading the same as investing?

While investors and traders both seek to make a profit from buying or selling in the financial markets, the main difference between the two is the time scale.

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.

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, regular 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 .

What are financial markets?

Essentially a marketplace that facilitates the trading of assets and financial instruments, a financial market is where a trader goes (either physically or electronically) to enter and exit positions on their chosen security.

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 financial trading of company stocks takes place. However, nowadays, most traders generally use online platforms to execute their positions.

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.

What assets can be traded?

There are multiple assets and financial instruments available to trade, with Tradu offering thousands across a variety of 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.
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).
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.
Cryptocurrency: This type of financial trading refers to decentralised digital currencies where coins and tokens are created and distributed over blockchain networks. Crypto is traded via a broker using financial derivatives such as CFDs.

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.

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.
Cryptocurrency market: Unlike with other markets, you can trade crypto all year round, 24 hours a day, seven days a week. This is due to the fact that this market is decentralised and not a regulated exchange.

Key considerations when trading

Trading the markets is risky and some markets can be more volatile than others. Whether you're a beginner or a 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. We have a range of resources to help you learn all there is to know about the financial markets.
Factors that affect the market: Each market and asset will be influenced by a range of factors that affect the value and direction. Take the time to understand what these are to help you to trade successfully.
Strategies: Every savvy trader should take the time to develop and make use of one or more strategies. 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.
Risk management: While it's vital that you never trade more than you can afford to lose, any experienced 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 stop loss orders.
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.

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 Tradu account in minutes at no cost.
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.
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, crypto, indices and commodities.

Take a look at our other guides for further tips on how to trade:

How to build a trading plan