What does trading mean in the context of finance? Trading is the act of buying and selling assets on an open market with the intention of making a profit, usually by capitalising on short- and long-term price changes.

In finance, the trade definition specifically describes buying and selling financial products such as forex, stocks, bonds, commodity CFDs, and cryptocurrencies, usually via a brokerage platform. Trillions of dollars worth of financial products are bought and sold on the global marketplace every single day, with demand for certain assets being driven by myriad factors.

The price (value) of assets changes on a second-by-second basis, largely as a result of demand for that asset. If demand for a stock of a particular company is high, then, the price of that stock will rise accordingly. There is a lot more to it than that, but this is the bare-bones meaning of trading.

What Assets Can You Trade?

Stocks (Equity Trading)

Stocks and shares are probably the most popular and frequently traded financial products in the world. A share is exactly that — a “share” or stake in a particular company. If a company chooses to “go public” via an IPO, its shares will be made available for sale via a public stock exchange such as the NASDAQ, the FTSE, or the S&P 500. When you buy a share in a listed company, you own a stake in that company.  

Currencies 

All currencies have different values relative to one another (i.e., one British pound might be worth 1.15 euros ). The prices of these currency “pairs” change regularly, which is why many forex traders attempt to make a profit by anticipating these price changes and buying and selling certain currency pairs accordingly. 

Commodities

Commodities are the backbone of the global economy and describe the bulk of global trade. The most important commodities are oil and gold, while significant markets also exist for materials such as silver, platinum, wheat, coffee, soybeans, sugar, and natural gas, to name a few. When buying and selling commodities as a financial trader, you are not actually physically buying the commodities in question. Rather, you are speculating on the price of those commodities by investing in forward and futures contracts. 

CFDs

A CFD, or contract for difference, is a financial product that takes the form of a contract between a buyer and a seller. The contract stipulates that the buyer agrees to pay the seller the difference between the current value of a particular asset and the value of that asset at the time of the contract. By doing this, anyone can attempt to profit from price movements of assets without going through the trouble of actually owning the underlying asset. A CFD does not consider the actual value of a particular asset — the only thing that matters is the difference between the two prices stipulated in the contract. CFDs are enormously popular assets among online traders, especially day traders. 

How Does Trading Work? Trading Explained

TIP: All traders require a broker to facilitate and settle trades. Once you have a broker, you can buy and sell a variety of assets on the global market, and take advantage of price changes to make a profit. It is worth highlighting here the difference between trading and investing.

What Affects Trading Activity? 

As a trader, your daily buying and selling will be impacted by a number of market factors that are important to understand if you wish to form a resilient trading strategy. These include:

Market Sentiment

This is an umbrella term that describes how the market generally feels about a particular asset. For example, a recession in the UK would weigh negatively on market sentiment vis-a-vis the British pound or the FTSE100. 

Time of Day

Although overnight trading is increasingly becoming the norm, price movements and availability of assets are still largely determined by the time of day. For example, if it is 3am Tokyo time, you may find that it is harder to buy and sell Japanese yen.

Liquidity 

This brings us to liquidity, which describes the availability of assets in a given market, often based on the volume of activity in that market. For example, gold is highly liquid in commodities markets, as demand is always high and trading volumes are always massive. 

Emotion 

Finally, it is important not to forget the role that emotions can play when it comes to trading. Traders and investors are just as human as the rest of us and can be prone to panic or overconfidence which can, in turn, affect asset prices. This is why it is important for traders to make use of stop-loss and take-profit orders in trading, to ensure that their emotions do not get the better of them.

With the right resources and information at your fingertips, you can embark upon a successful trading career. Check out the wealth of resources available on eToro to see how we can empower you to make sense of the financial markets.