What is Trading?
You might well be familiar with the term ‘trading’. The majority of us has probably used in our daily life and we don’t even know we have done so. In a nutshell everything you buy in a store is trading your money for the goods you need.
At TopTradingPlatforms.co.uk you will learn how to trade the financial markets online. But let’s get a step back. What is online trading? This article will help you understand what trading is and how it works so you can move your first steps into it.
The principles of trading
What is the meaning of ‘trading’? Well, simply speaking ‘trading’ means ‘exchanging one item for another’. In the everyday life as we have seen it could be exchanging good for money or as we normally say, buy something.
In the financial markets the principle is exactly the same. If you think someone who trade shares for example what they do is: firstly they buy the shares of a company. Then they check the value of those shares and if they do increase than they make money by selling them again at a higher price. So this is trading. Is the act of buying something for a determined price and sell it later on for another (hopefully at a higher price so that there is a margin).
But what is the reason why the value of the shares will move and increase or decrease? Well, the answer to this is rather simple. The value of something is affect by the supply and demand. If there is a lot of demand for something it means more people are willing to pay for it so the price is likely to increase.
Increase in demand means an increase in price
Let’s fully understand this concept by making an everyday example. Let’s say we are in a market and there are 10 apples only left to sell. Imagine this is the only place where you can buy apples. If you are the only person that are asking for apples and you only need a couple than the stall owner will probably sell those to you at a reasonable price. But let’s imagine a situation where there are 15 people that are coming into the market and each of them want to buy apples. To make sure they get what they want they are willing to pay more for those. For this reason the market stall owner can increase the price as the demand is overcoming supply.
The price will increase until the customers believe that they are too expensive. At that point they will stop buying them and the market stall owner will realise that he will need to stop increasing the price and maybe move it back down a bit to incentivise the customers to start buying the apples again.
Increase in supply means a decrease in price
Now let’s imagine the scenario where another market stall owner comes into the market and has even more apple to sell. Now the supply of apples has increased significantly. The second market stall owner is also selling the apples at a cheaper price than the first one and this will force the first stall owner to also bring his prices down.
The increase in supply will therefore bring down the price of the apples. The price at which demand matches supply is also known as ‘market price’ which is the price level at which both the market stall owner and the customers agree on both a price and number of apples sold.
Application to the financial markets
Supply and demand is the same concept valid in the financial world. Let’s imagine that a company is posting very good results and also it is paying out very high dividends. This will attract lots of people that want shares in that company: as a result the increased demand will cause the pice of those shares to rise.
What is Online Trading?
For decades financial trading was only done between banks and financial institutions. This means that if you were outside of these institutions you were unable to take part. The development of the internet has allowed everyone to be able to trade online. Nowadays everything can be traded online: stocks, currencies, commodities, physical goods and a lot more other things. For now tough don’t think about those: just remember that if something can be traded than it will be traded. Of the markets we have just mentioned the forex market is by far the biggest. Around $4 trillion worth of currency is traded every day and this is bigger than any stock exchange in the world.
So Online trading is simply buying and selling assets via an internet based broker that has proprietary trading platforms. Online trading increased significantly towards the late 90s as better computers and faster internet connections become a reality.
In the past investors and traders would have to make a call to their brokerage firms so that they could place a trade on their behalf. Let’s say Mark wanted to buy 50 shares of Intel he would need to call his broker and ask them to carry out that request. The broker will than confirm the market price and proceed with the order. The broker will also confirm the commission costs for doing the trade. When all has been agreed the broker will than place the trade in the system which was connected to trading floors and exchanges (like the New York Stock Exchange or the NASDAQ). When all would have gone through the client would receive a trade confirmation via mail and also a monthly or quarterly statement with a list of his investments.
As you can see it was a very lengthy and slow process. With the arrival of the internet and the digital era things have changed completely and more and more investors are using online trading platforms that are offered by their brokers to do DYI (do-it-yourself) investments.
You have to think as the online trading platform as a hub that allow investors to trade. They can place buy and sell orders, place market, limit, stop, stop-loss, stop-limit orders and so on. They can also view real-time quotes and get the latest news on companies. In addition to that they will also have access to top advanced tools like charting to help them in the analysis. At any time investors will have complete visibility of all their investments status.
The arrival of online trading has completely revolutionised the industry with costs that have decreased rapidly for both investors and brokers. Brokers had to lower commissions in order to attract customers and in doing so they have incentivised people to do all their investing themselves via their online trading platforms. The lower costs of trades and the low minimum deposits needed have also opened the markets to a wider range of people that before could not afford the high commission fees asked by a personal advisor or by an over-the-phone broker.
Another massive change of the online trading is that the speed at which transactions can be executed and settled has increased significantly. There is no need for paper-based documents everything is digitalised which means the time it takes to do everything has gone down significantly. Every trade is now full completed in the matters of seconds.
So as we have seen there are lots of benefits of the arrival of the online trading. There are also some cons tough as in the last years we have seen some rogue online brokers creating multiple issues fo investors and traders. It is very important to do due diligence before opening an online trading account with an online broker. The competition out there is huge and this is where a site like TopTradingPlatforms.co.uk can really help as we do compare the most reputable online brokers and trading platforms for you.