What is trading and how does it work?

What is financial trading?

Financial trading means taking positions on the price movements of assets. A trader buys when they expect a price to rise and sells, or 'goes short', when they expect it to fall. Unlike investing, which focuses on long-term ownership and wealth building, trading is typically shorter-term and uses leverage to amplify exposure. Leverage means you deposit only a fraction of the position's full value, known as margin.

Trading can be done through several instruments. In the UK, the most common are spread bets, which are free from capital gains tax, and contracts for difference (CFDs). Both allow traders to go long or short across thousands of markets from a single trading account.

What markets can you trade?

Financial markets are the venues where assets are bought and sold. The main categories available to UK traders are:

Shares

Individual company stocks listed on exchanges like the London Stock Exchange, NYSE or NASDAQ. Share trading can be done directly through a share dealing account (ownership) or via spread bets and CFDs (no ownership, leveraged). Shares vary enormously in volatility and liquidity, from large-cap FTSE 100 names to smaller, more speculative growth companies.

Indices

Stock market indices such as the FTSE 100, S&P 500, Nasdaq 100 and Germany 40 track baskets of shares. Trading an index gives broad market exposure without requiring individual stock selection. Indices are among the most popular markets for spread bettors and CFD traders due to their liquidity and the availability of 24-hour pricing.

Forex

The foreign exchange market is the largest financial market in the world by daily turnover, with over $7 trillion traded daily. UK traders access it through spread bets and CFDs on currency pairs such as GBP/USD, EUR/USD and USD/JPY. Forex operates 24 hours a day, five days a week.

Commodities

Physical commodities including gold, silver, oil, natural gas and agricultural products are traded via futures, spread bets and CFDs. Commodity prices are driven by global supply and demand, geopolitical developments and the relative strength of the US dollar.

ETFs and ETPs

Exchange-traded funds and other exchange-traded products can be traded via spread bets and CFDs for short-term positions, or bought through a share dealing account for long-term investment. Index funds and ETFs have key structural differences in how they trade and how costs are calculated that affect which is more appropriate depending on your goals.

Cryptocurrencies

Cryptocurrency markets, including Bitcoin and Ethereum, are available to trade via spread bets and CFDs on our platform. Crypto is highly volatile and carries specific risks beyond other asset classes. Do not invest unless you are prepared to lose all the money you invest.

How does trading work?

Understanding the mechanics of trading requires familiarity with a few key concepts:

Long and short positions

Going long means buying in expectation of a price rise. Going short means selling an asset you do not own (or using a derivative) in expectation of a price fall. The ability to go short is one of the main reasons traders use spread bets and CFDs rather than buying shares outright.

Leverage and margin

Leverage allows traders to control a large position with a relatively small deposit. A 5% margin requirement means a £10,000 position requires only £500 upfront. However, profits and losses are calculated on the full position value, not just the margin. Leverage amplifies both potential gains and potential losses, and appropriate risk management strategies such as stop-loss orders should be researched and used to help prevent excessive losses.

Spread

The spread is the difference between the buy price and the sell price of a market. It is the primary cost of most spread betting and CFD trades. Tighter spreads mean lower transaction costs. Spreads widen during periods of low liquidity and high volatility.

Stop-loss and take-profit orders

A stop-loss automatically closes a position if the price moves a specified amount against you, limiting your loss. A take-profit closes the position when it reaches your target price. Using both before you open a trade is a fundamental part of risk management.

Financial trading: key figures

Trading styles and timeframes

Different traders operate over very different timeframes. The main styles are:

Trading ETFs and funds

ETFs are one of the most versatile instruments available to traders and investors. For short-term traders, spread bets and CFDs on UK ETFs and global ETFs provide leveraged exposure to entire market segments in a single trade.

For long-term investors, ETFs held in a share dealing account or ISA provide diversified, low-cost exposure to global markets. ETFs, ETCs and ETNs are all distinct instruments with different risk profiles and structures, and the differences matter when choosing between them.

Risks associated with trading

• Leverage risk: losses are calculated on the full position value, not just the margin. A small adverse price move can result in a loss larger than your initial deposit.
• Volatility risk: prices can move sharply and quickly, particularly around major economic events, earnings releases and geopolitical news.
• Overtrading: transaction costs accumulate with frequent trading. Too many positions can also make risk management difficult to maintain.
• Emotional decision-making: trading losses are psychologically difficult. Abandoning a trading plan in response to losses is one of the most common mistakes.
• Platform and execution risk: in fast-moving markets, there can be slippage between the intended and actual execution price.

Trading FAQs