In plain English: what is trading?
Trading is speculating on an underlying asset’s market price movement without owning it. So, basically, trading means that you’re only predicting whether a financial asset’s price will rise or fall.
You can trade hundreds of financial markets, including stocks, forex, commodities, indices, bonds and more. We offer more than 13,000 CFD markets for you to speculate on – think Meta shares, the US dollar against the British pound, crude oil and the FTSE 100.
When you trade, you’ll use a platform like ours to access these markets and take a position on whether you think a market’s price will rise or fall. If your prediction is correct, you’ll make a profit. If incorrect, you’ll incur a loss.
The financial instruments you’ll use to trade on an asset’s price movements are known as ‘derivatives’. This simply means that the instrument’s price is ‘derived’ from the price of the underlying, like a company share or an ounce of gold. As the price of the underlying asset changes, so does the value of the derivative.
To understand this, let’s look at an example of speculating on shares. If the price of a share goes up from $100 to $105, the value of the derivative will increase by the same amount. If you bought the derivative at $100, you could now sell it at $105. Although you never own the share itself, your profit or loss will mirror its price movements.
So, why use a derivative?
With derivatives trading, you can go long or short – meaning you can make a profit if that market’s price rises or falls, as long as you predict it correctly. Contrarily, if the market moved against your speculation, you’d incur a loss. This is because trading isn’t owning the actual financial asset. With owning something outright, such as gold for example, you’ll only make a profit if the gold price climbs.
Leverage can be another reason to trade with derivatives.
Trading with leverage means that, instead of paying the total value of your trade upfront, you’ll put down a fraction of its value as a deposit. This is called ‘margin’. This means leverage can stretch your capital much further as you can open large positions for a smaller initial amount.
With leverage, your total profits or losses are calculated based on the full position’s value, not how much you paid to open that position. You can make far more than the initial margin amount you paid to trade – and you can also lose far more. This means leverage has built-in risk.
All of this new terminology can be a lot to digest. So, we’ve created a table below with five key trading terms every beginner should know.
5 key trading terms
CFDs (contracts for difference) are a type of derivative that enables you to trade on the price movements of an underlying asset. You’d do this by agreeing to exchange the difference in that asset’s price from the time you open your position to when you close it. The difference at these two points is what you stand to gain or lose.
|Going long, going short||
Going long (also known as ‘buying’) is a prediction that a market’s price will rise; whereas, going short (also known as ‘selling’) is a prediction that it’ll fall. However, short selling is risky because losses can be unlimited if risk isn’t managed properly, since there’s no limit to how much a market’s price can rise.
|Trading on margin||
Trading on margin, ie opening a position for less than the total value of your trade, is also known as a ‘leveraged’ trade. For example, if you bought 10 CFDs on shares worth $100 each, the position’s total value is $1000. With a margin deposit of 20%, you could open a trade of this value with $200.
Margin is risky in the sense that you risk losing far more than your initial deposit, and your losses can far exceed your margin amount. Risk represents the possibility of monetary loss. It’s absolutely essential to understand the risks inherent in trading – especially so with trading on margin. Fortunately, we offer mechanisms to help you manage your risk.
Volatility refers to times when markets are moving rapidly, typically as a result of announcements, events or market sentiment. While it inherently comes with higher risks, you can also find opportunities if you have a solid trading plan that includes comprehensive risk management measures.
Financial markets for new traders
We offer over 13,000 popular financial markets. With us, you’ll trade these markets using CFDs.
What is share trading?
Share trading is speculating on whether the share price of a public company will rise or fall. This means you can go long or short: if you’re bullish, you’d go long; or you’d go short if you’re bearish. Either way, if your speculation is correct, you’d make a profit. On the other hand, you’d incur a loss if you predicted the market movement incorrectly.
What is forex trading?
Forex trading is the exchange of one currency for another. The forex market is the biggest and most liquid in the world – it’s decentralised and one of the few true 24/7 markets.
Forex is traded in pairs, which consist of two currencies that are traded against each other. There are hundreds of different combinations to choose from, but some of the most popular include the Euro against the US dollar (known as the EUR/USD), the US dollar against the Japanese yen (USD/JPY) and the British pound against the US dollar (GBP/USD).
When trading forex, you’ll be speculating on whether one currency’s price will rise or fall against another currency – for example, if the US dollar (USD) will weaken or strengthen against the Euro (EUR).
If your prediction is correct, you’ll make a profit. If incorrect, you’ll incur a loss. As with trading other markets, you can go both long and short.
What is index trading?
Index trading is speculating on the price movements of a collection of underlying assets that are grouped together into one entity. When you trade on the index, you’re trading on all its constituents at the same time.
Types of indices you can trade include :
- Equity indices
- Sector indices
- Bond indices
- Commodity indices
- Real estate investment trust (REIT) indices
An index’s components will always have something in common which groups them together, eg the 500 biggest US-listed companies by market cap are grouped into the S&P 500 index.
We offer over 80 international indices, so you can trade any of the world’s the biggest and most popular indices with us.
What is commodities trading?
Commodities trading is speculating on the market price of natural resources such as gold, sugar cane and Brent crude oil. There are ‘hard’ and ‘soft’ commodities. Hard commodities are mined substances like precious metals, diamonds, oils, gases, and the like. Soft commodities are plant and animal resources like grains, sugar cane, coffee beans and cattle and other livestock.
Some commodities, like gold for instance, have a reputation for being a safe haven in troubled times and are often used as hedges against things such as inflation and macroeconomic volatility.
Trading for beginners: where to learn more
Getting started with trading can be an intimidating experience, with so much to learn. That’s why we created IG Academy, a self-learning hub on our platform, full of interactive online courses, webinars, and live sessions with our resident experts.
IG Academy’s content ranges from the most beginner concepts right up to the very advanced, professional trader level. It’s completely free and easy to use.
Once you’ve got the basics down, our website’s analyse and learn section also contains a host of resources, including strategy and planning articles that help you perfect your technique and news and trade ideas to keep you up to date on current market events. There are even trading podcasts, seminars, and tips on risk management, too.
But, as we all know, practice makes perfect. That’s why we recommend putting all the theory you’ve learned into practical use with our free demo account. Here, you’ll be able to trade with $20,000 in virtual funds in a risk-free environment to hone your techniques and build your confidence before doing it for real.
Your first trade: how to do it
After learning about trading beforehand, the only thing left to do is to make your first trade on our live platform. However, if you still want to know more about entering the world of trading, read our How to get into trading page.
Here’s how to make your first trade:
- Open and fund your live account
- After careful analysis of the market, select your opportunity
- ‘Buy’ if you think that market’s price will rise, or ‘sell’ if you think it’ll fall
- Select your deal size, ie the number of CFD contracts
- Take steps to manage your risk
- Open and monitor your position by selecting ‘place deal’
Why trade with us?
There are many trading platforms out there, so why should you choose us?
We have been a market leader since 1974. We’re also focused on the success of our clients, providing a host of educational resources and more.
Here are just a few more reasons to trade with us:
Deal with the best
Our award-winning platforms are built to empower the pursuit of financial freedom1
Access thousands of markets
Trade on over 13,000 CFD markets, including stocks, forex, indices and commodities
Learn and build your skills
Draw from our decades of industry experience through educational resources such as IG Academy
Risks and benefits beginner traders should know
You’ll need to evaluate the risks versus the rewards for any trade before you open a position. Here, we’ve included some of the main risks and benefits that beginner traders should know:
|Leverage – all CFD trades are leveraged, meaning profits and losses can substantially outweigh your initial margin, and you can incur losses rapidly||Leverage – because leveraged trades only require you to put up a fraction of the total position’s value, you can stretch your capital and magnify profits, if you make them|
|Short selling – can give higher risk of losses if a market moves unpredictably. If its price increases, losses could be unlimited, as there’s no limit to how high a market’s price can climb||Short selling – going short doubles your trading opportunities, because you can profit (or make a loss) from down trending markets as well as appreciating ones|
|Volatility – markets can be volatile, moving very quickly and unexpectedly in reaction to announcements, events, or trader behaviour||Volatility – a trader with a solid strategy and risk management measures in place can find opportunities to trade on volatility|
|Margin call – you need a certain amount of money in your account, called margin, to keep trades open. If your account balance doesn’t cover our margin requirements, we may close your positions for you||Margin call – you can use risk management tools such as stop orders and alerts to keep up with margin requirements and limit your potential losses|
1 Best Finance App, Best Multi-Platform Provider and Best Platform for the Active Trader as awarded at the ADVFN International Financial Awards 2022.