What is trading?
At its simplest, the word trading means exchanging one item for another.
Trade originated in prehistoric times, where people would exchange goods and services, before the invention of modern currency.
What you might not immediately realize is that the simple act of buying or selling something is also classified as trading. When you walk into a store to purchase groceries, you’re essentially trading money for products.
What is financial trading?
Financial trading may be where things get a little confusing.
Not because it’s difficult to grasp the basics, but because you’ll likely come across terminology you haven’t heard before. If you cut through all the jargon, however, the main concepts are easy to understand.
Simply put, financial trading is the buying and selling of financial instruments. These instruments can take many shapes and forms like stocks, commodities, and of course, forex.
Regardless of what you are trading, the basic principle is always the same. You predict whether the price of an instrument will go up or down. If you get it right, you could be looking at a nice profit. But if you get it wrong, you stand to incur a loss.
Supply and demand
At the heart of any trade, lies supply and demand.
This can have a major effect on the price of any financial instrument. When the supply is high and demand is low, the price will be lower. Alternatively, if supply is restricted and the demand is high, the price will be higher.
Let’s say, the U.S. economy was performing very well. This would make people want to buy the U.S. dollar, as it would likely benefit from the strengthening economy. Consequently, this increase in demand for the dollar would see an increase in the price to buy it as well.
For another, more recent example, let’s take a look at the price of oil during the Covid-19 pandemic. As people around the world were confined to their houses, the demand for oil dropped considerably. This, in turn, led to a steep drop in the price of oil, as supply greatly outweighed demand.
Let’s recap
- Trading means exchanging one item for another
- Financial trading is the buying and selling of financial instruments
- Financial instruments include forex, stocks, commodities and more
- Supply and demand are central to any trade
- When supply is high and demand is low, the price will be lower. When supply is low and demand is high, the price will be higher