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what is trading?

Monday, Nov 19 2018 11:30AM

What is Trading?
Everybody is familiar with the term “trading”. Most of us have traded in our everyday life, although we may not even know that we have done so. Essentially, everything you buy in a store is trading money for the goods you want.

At tradimo you will learn how to trade the financial markets online – but exactly what is online trading? This article will give you an understanding of how trading can be defined and how online trading works.
The principles of trading
The term “trading” simply means “exchanging one item for another”. We usually understand this to be the exchanging of goods for money or in other words, simply buying something.

When we talk about trading in the financial markets, it is the same principle. Think about someone who trades shares. What they are actually doing is buying shares (or a small part) of a company. If the value of those shares increases, then they make money by selling them again at a higher price. This is trading. You buy something for one price and sell it again for another — hopefully at a higher price, thus making a profit and vice versa.
But why would the value of the shares go up? The answer is simple: the value changes due to supply and demand – the more demand there is for something, the more people are willing to pay for it.

Increase in demand means an increase in price
We can explain this using a simple everyday example of buying food. Let’s say you are in a market and there are only ten apples left on a stall. This is the only place where you can buy apples. If you are the only person and you only want a couple of apples, then the market stall owner will most likely sell them to you at a reasonable price.

Now let's say that fifteen people enter the market and they all want apples. To make sure that they will actually get them before the others do, they are willing to pay more for them. Hence, the market stall owner can put the price up, because he knows that there is more demand for the apples than supply of them.
Once the apples reach a price at which the customers think they are too expensive, they will then stop buying them. When the market stall owner realises that he is not selling his apples anymore because they are too expensive, he will stop raising the price and it may come back down to a level, at which customers will start to buy the apples again.
Increase in supply means a decrease in price
Let’s say that suddenly another market stall owner comes into the market and has even more apples to sell. The supply of apples has now increased dramatically. It stands to reason that the second market stall owner may want to sell apples at a cheaper price than the first stall owner to entice customers. It also stands to reason that the customers would probably want to buy at the lower price.

Seeing this, the first stall owner will most likely bring his prices down. The sudden increase in supply has therefore brought the price of the apples down.

The price at which demand matches supply is called the “market price”, i.e. 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
The concept of supply and demand is the same in the financial world.

If a company posted some great results and is paying very good dividends, then more people want to buy the shares of the company. This increased demand will lead to an increase of the price of those shares.
What is online trading?
For a long time financial trading was purely conducted electronically between banks and financial institutions. This meant that trading in the financial markets was closed to anyone outside of these institutions. With the development of high speed Internet, anyone who wanted to become involved in trading was able to do so online.

Almost anything can be traded online: stocks, currencies, commodities, physical goods and a whole host of other things – at this stage, you do not need to worry about all of these. For now, just keep in mind that if something can be traded, it will be traded. Out of all of these markets, the forex market is the largest. Almost $4 trillion worth of currency is traded every single day – this is bigger than any stock exchange anywhere in the world.

What is Trading?
What is a Forex Broker?
If you want to trade in the forex markets, you need a broker. But what exactly is a broker? To understand this, consider the following:

Let’s say you want to buy an apple, so you go to a street market. The apple is what you want to buy – the street market is the place where you can do this, because that is where people are selling apples.
Similarly, imagine you are now selling apples and need to find customers; you can go to the street market because that is where your customers are – that is where there are people buying apples.

The street market is a place where buyers and sellers meet. However, when you go to a street market, you do not generally see many people selling apples to each other; they will be sold through a stall.

In the forex markets, this is no different. You have buyers and sellers of different currencies – they need a place to come together and there needs to be a facility to actually buy and sell those currencies.

In the forex markets, however, the buyers and sellers can be thousands of miles apart. In order to find each other, there must be a mechanism that matches their interests: this is where the broker comes in.

The forex broker's role
A broker is a place where buyers and sellers go to buy and sell instruments, such as currencies.

The forex broker operates as a middleman between you and the market. In other words, in order to find a buyer or a seller of currencies, you can go to a broker and they match you up with either a respective seller or a respective buyer.

However, instead of just being the middleman between you and another buyer or seller, they are also the middlemen between you and what is called a “liquidity provider”.
Liquidity provider
To explain liquidity provider, we will start with the basic idea of liquidity. Let’s say you want to exchange currency – in other words, buy a certain amount of a particular currency.

In order for you to buy that currency, there must be someone to sell that currency to you. In order to sell the currency, there must be someone willing to buy that currency off of you.

If there are many people that want to buy the currency that you are selling, then it is likely that you will be able to sell. If there are many people selling the currency that you wish to buy, then it is likely that you are going to be able to buy the currency that you want. When there is an abundance of buyers and sellers in the market, it is said that the market is “liquid”.

There is another way in which a market can be liquid. Let’s say that you would like to buy currency, but instead of there being many individuals selling small quantities of currency, there are fewer sellers that are selling larger amounts of currency. The market is still liquid. These sellers that are selling huge amounts are called liquidity providers because they are actually providing liquidity in the markets – large banks or financial institutions that trade currencies on a large scale.

In other words, they are trading such vast quantities of currency that when you sell, you are likely to be selling to a liquidity provider and when you buy, you are likely to be buying from a liquidity provider. They are trading so much money that there is always a party to trade with.

When it is said that a broker will pass your trade on to a liquidity provider, what this means is that the broker will match your contract up with a liquidity provider, such as a bank or another financial institution, to take the other side of your trade.

What is Trading?
Everybody is familiar with the term “trading”. Most of us have traded in our everyday life, although we may not even know that we have done so. Essentially, everything you buy in a store is trading money for the goods you want.

At tradimo you will learn how to trade the financial markets online – but exactly what is online trading? This article will give you an understanding of how trading can be defined and how online trading works.
Everybody is familiar with the term “trading”. Most of us have traded in our everyday life, although we may not even know that we have done so. Essentially, everything you buy in a store is trading money for the goods you want.

Now let's say that fifteen people enter the market and they all want apples. To make sure that they will actually get them before the others do, they are willing to pay more for them. Hence, the market stall owner can put the price up, because he knows that there is more demand for the apples than supply of them.
Increase in supply means a decrease in price
Let’s say that suddenly another market stall owner comes into the market and has even more apples to sell. The supply of apples has now increased dramatically. It stands to reason that the second market stall owner may want to sell apples at a cheaper price than the first stall owner to entice customers. It also stands to reason that the customers would probably want to buy at the lower price.

Seeing this, the first stall owner will most likely bring his prices down. The sudden increase in supply has therefore brought the price of the apples down.

The price at which demand matches supply is called the “market price”, i.e. the price level at which both the market stall owner and the customers agree on both a price and number of apples sold.


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