What is trading and how does it work?

Financial trading is no different to any other form of trading: it’s about buying and selling assets with the aim of making a profit. Discover key concepts, participants and markets involved in financial trading.

What is trading?

Trading is the buying and selling of financial instruments in order to make a profit. These instruments range from a variety of assets that are assigned a financial value that can go up or down – and you can trade on the direction they’ll take.

You may have heard about stocks, shares and funds. But there are thousands of financial markets you can trade, and a variety of products you can use to trade them.

You can get exposure to markets as diverse as the S&P 500, the FTSE 100, global currencies like the US dollar or Japanese yen, or even commodities like lean hog or cattle.

To get started, you’d need to create an account on a platform that offers your preferred markets. Our online trading platform has a variety of financial markets that enable you to speculate whether the price of an asset will rise or fall. Plus, we’ve compiled a trading for beginner’s guide below to assist you in getting familiar with the different markets.

What assets and markets can you trade?

There are more than 17,000 financial assets and markets that you can trade with us.
These include:

• Shares
• Indices
• Forex
• ETFs
• Bonds
• Commodities
• Interest rates
• IPOs

Whatever instrument you trade, the ultimate intended outcome is always the same: to make a profit. If your speculation about the market’s movement is correct, you’ll make a profit. But, if the market moves against your position, you’ll make a loss.

It’s important to note that trading is inherently risky – and you could lose more than you expected if you don’t take the appropriate risk management steps.Learn more about the different financial markets that you can trade

Trading vs investing

The difference between trading and investing lies in the means of making a profit and whether you take ownership of the asset. Traders make profits from buying low and selling high (going long) or selling high and buying low (going short), usually over the short or medium term. Since the trader would only be speculating on the market price’s future movement, be it bullish or bearish, they wouldn’t gain ownership of the underlying asset.

Investors aim to buy the underlying outright at a favourable price. They make profits from owning the asset, and then selling it at a higher price. The hope is that the market price rises over the long term so that they can profit through difference in price. Investors could also earn income in the form of dividends (in the case of stocks) if the company grants them. Plus, they’ll have shareholder voting rights (if eligible).

Remember, with us you can only trade derivatives via CFDs.Learn more about the differences between trading and investing

Who trades and who invests?

Traders, as opposed to investors, are those who’d prefer to make use of leverage and derivatives to go long or short on various markets.

Individuals (called retail traders), institutions and governments participate in financial markets by buying and selling assets with the aim of making a profit.

In 2021, retail traders accounted for 23% of all US equity trading, double the 2019 figure, buying more than $1.9 billion in stocks.^{1, 2} Coronavirus-related volatility, which saw stock prices fluctuating at an unprecedented rate, was followed by these soaring numbers.

Some financial traders stick to a particular instrument or asset class, while others have more diverse portfolios. Governments and institutions can adapt at a much faster pace, as they often have departments that focus on trading different sectors and industries. Institutions remain the biggest participants in the market, with about 77% of trades attributed to them.

For individuals to invest on the stock exchange, they must go through a stockbroker that will execute the order. They’ll do their due diligence, research before placing a trade, read charts, study trends; and the broker will act on their behalf. Retail traders take positions from their own private accounts, which they fund – they bear the full risk of losing their capital.

Institutions that trade include commercial banks, hedge funds, and corporations that have an influence on the liquidity and volatility of stocks in the market. This is because they typically engage in block trades, which comprises of buying or selling at least 10,000 shares or more at a time.³

These entities stand to profit from supply and demand of goods or products, political instability, the availability of currency (including the movement of interest rates), and many other factors.

How does trading work?

When you trade, you profit if the market price moves in the same direction as your speculation; however, if it takes the opposite direction, you incur a loss.

The basic premise to remember is supply and demand. When there are more buyers than sellers in the market, demand is greater, and the price goes up. If there are more sellers than buyers in the market, demand is reduced, and the price goes down.

Getting exposure to assets can only be carried out over the counter (OTC) or directly on an exchange.

Trading OTC involves two parties (trader and broker) reaching an agreement on the price to buy and sell an asset. Whereas a centralised exchange is a highly organised marketplace where you can trade a specific type of instrument directly.

Shares are more accessible when trading OTC using derivatives like CFDs (compared to directly on a centralised exchange).

	OTC	Exchange
Definitions	Trading happens between two parties and often involves a dealer network	Trading happens directly on the order book of the exchange – there’s no middleman
Locations	No central, physical location – only a virtual network of participants	Actual, physical location
Timings	24/7	Specific exchange hours
Contracts	Customised	Standardised
Risk	Counterparty risk, assets can be more volatile, and since OTC can be traded on leverage, it means there’s risk of losing more than your deposit	Higher cost, fixed hours, and you can trade on leverage in some cases (options and futures)

How to start trading

CFDs are popular trading vehicles that enable traders to get exposure to underlying assets through leverage. Compared to trading directly on a centralised exchange, they offer increased accessibility to the underlying. With CFDs, you can also get exposure to various markets via listed futures and options.

Here are the steps you’ll take to start trading on our platform:

1. Choose your trading account

With us, you can create a live or demo trading account. It’s important to note, especially when trading CFDs with real funds, that you’ll only make a profit if your prediction is correct – if it isn’t, you’ll incur a loss. Additionally, the exact amount – be it a profit or a loss – is based on the difference between the opening and the closing price.

Create live trading account

You can learn how CFD trading works by opening a demo account with us. . Your account will be credited with $20,000 in virtual funds that you can use to practise and build your confidence in a risk-free environment. No withdrawals can be made from this account, as the funds are for enactment purposes only.

2. Pick your asset and market

Choose a market that you’re familiar with, or an asset that you can trade based on your experience and risk appetite.

We offer over 13,000 CFD markets to trade like shares, forex, commodities, indices, bonds and more. Our platform features a search bar to help you find the market that interests you, or you can navigate through the most popular markets in the left pane.

You can also access all these features on our mobile app. 50% of our users track their account balances, open positions and view past transactions using our trading app.

3. Decide whether to trade the spot price, futures, or options

You can trade the spot price on all of our markets. Spot trading means buying and selling assets at the current market rate – known as the spot, or cash, price. It’s generally preferred by short-term traders as positions have no fixed expiry date, and the spread is relatively low. Overnight fees apply to spot trading.

You can also trade futures (known as forwards in certain markets). Futures give you the right to buy or sell the underlying asset at a predetermined price by a certain date, before the contract’s expiry. Futures have higher spreads but no overnight fees, and are often favoured by medium- to long-term traders.

Some traders prefer options over futures because various strategies can be employed to limit risk and exposure is non-linear, with more ways to potentially profit. The time value, also called theta, of an option also decays in a non-linear manner.

CFD trading

Trading examples

Check out some examples of financial trading and find out how to get started:

• Trading shares via CFDs
• Trading indices via CFDs

Say eBay shares are currently trading at $51.615 with a buy price of $51.630 and a sell price of $51.600. You anticipate that the stock is going to increase in value over the next few days, so you decide to buy 150 share CFDs at $51.630.

If the eBay share price did climb and was trading at $52.615 with a new buy price of $52.630 and sell price of $52.600, you’d close your position by reversing your initial trade, selling 150 share CFDs at $52.600.

To calculate your profit, you’d multiply the difference between the closing price and opening price of your trade by its size. In this case, your profit would be $145.50 ([$52.600 – $51.630] x 150), excluding any additional costs.

However, if the eBay share price had decreased to $50.515 (buy price $50.530 and sell price $50.500) and you closed your position by selling the shares at the new sell price, you’d make a loss. You could calculate this loss by multiplying the difference between the closing price and opening price of your trade by its size. In this case, that would be a loss of $169.50 ([$51.630 – $50.500] x 150 share CFDs), excluding any additional costs.

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