What is financial trading?

Introduction

When you first start looking in to it, financial trading can be confusing. You're likely to hear a lot of jargon surrounding it, some fairly recognisable such as interest rate, broker, commodity or dividend, and some you may never have heard before, such as a long strangle, EBITDA or ichimoku cloud.

However, beneath all the terminology, there's one core principle that underpins financial trading: predicting whether something will go up in price, or down. Get it right and there's opportunity for great rewards. But get it wrong and you could lose a lot of money.

Trading Academy

That's where we come in. The purpose of our Trading Academy is to take you through financial trading from first principles. The more information you have, the less likely you are to make costly mistakes. And our goal is to provide you with all the knowledge you need to start making informed trading decisions.

We're going to be looking at what, where and how you can trade. We'll teach you how to look out for trading opportunities, we'll investigate how to manage your risk, and we'll look at what techniques the professionals use to become consistently profitable traders - and much, much more.

But before we do all that, let's address the fundamental question about financial trading. What exactly is it?

What is financial trading?

Very simply, financial trading is the buying and selling of financial instruments. These instruments can take many forms, but some of the main categories are:

Shares - small units of ownership in a company, such as Apple, Google, HSBC

Indices - the value of a group of companies, represented as a single number, eg the FTSE 100, S&P 500, Nikkei 225

Forex - global currencies, including the pound, dollar, euro

Commodities - physical assets, raw materials and agricultural products, for example gold, oil, corn

People and companies often trade financial instruments because they need the assets for themselves or their business. For example, you may be travelling from Europe to the USA and want to convert euros to dollars. To do this you would participate in the forex market.

Forex Market

Or, a laptop manufacturer might need a large shipment of aluminium to build components for its computers. When buying the metal, the firm would be participating in the commodity market.

Commodity Market

However, most of the time financial traders don't need the assets at all. They are simply looking to make a profit from movements in the price, for example by buying low, then selling high.

What are the financial markets?

Just like any other form of market, financial markets are where buyers and sellers come to trade. They are often physical locations where traders meet to exchange a certain type of asset, eg:

+ Shares at the London Stock Exchange (LSE)

+ Commodities at the Chicago Mercantile Exchange (CME)

CME Group

But they can also be electronic systems, such as:

The NASDAQ stock exchange

NASDAQ

The forex market (essentially a network of large banks and currency providers)

The forex market

We'll look at the different types of market in more detail later in this course.

Financial markets enable traders to exchange assets quickly and easily, because all buyers and sellers are in the same place - sometimes literally, sometimes electronically, sometimes both.

They also tend to have very strict rules and regulations, which helps to reduce fraud and illegal activity. For example, if you wanted to purchase some cotton on a regulated commodity exchange, you could buy it without needing to inspect it, safe in the knowledge it had been through a number of quality checks beforehand.

Did you know? Did you know?

Despite the number and variety of different financial markets, when people refer to 'the market' they're usually talking about the value of stocks and shares.

If the market has 'gone up' then on average shares are performing well. This is because share trading is the most widely known and understood methods of participating in the financial markets.

Lesson summary

  • Financial trading is the buying and selling of financial instruments
  • There are many types of financial asset, including shares, indices, forex and commodities
  • Most of the time financial traders don't want or need the assets - they trade to make a profit
  • Financial markets are where buyers and sellers come to trade
  • The markets are regulated to reduce fraud, keep transaction costs low and improve efficiency
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