What is trading? Financial trading explained
Financial trading is no different to any other form of trading: it is about buying and selling assets in the hope of making a profit. Let’s discuss the key concepts, participants and markets involved in financial trading.
What’s on this page?
What is financial trading?
Financial trading is the buying and selling of financial assets. It’s carried out in two ways: via an exchange or over the counter (OTC).
An exchange is a highly-organised marketplace where you can trade a specific type of instrument. For example, you can trade US shares on the New York Stock Exchange (NYSE). When you trade over the counter, the trade is made directly between two parties. For example, trading spread bets or CFDs with us.
|Definitions||Trading between two parties – often involves a dealer network||Trading takes place directly on the order book of the exchange – no middle man involved|
|Locations||No central physical location – virtual network of participants||Physical location|
Assets can be more volatile
Leveraged trading – risk of losing more than your deposit
What markets can you trade?
There are more than 17,000 financial markets and instruments that you can trade with us. These include:
Whatever the instrument being traded, the intended outcome is always the same: to make a profit. If you buy an instrument for less than you sell it for, you’ll make a profit. But, if you sell an instrument for less than what you bought it, you’ll make a loss. However, trading is inherently risky – and you can lose a lot more than you can afford if you don’t take the appropriate risk management steps.
In financial markets, millions of companies, individuals, institutions and even governments are all trading at the same time. But what is a trader? A trader is defined as a person who buys and sells financial instruments with the aim of making a profit.
Some traders stick to a particular instrument or asset class, while others have more diverse portfolios. Some do lots of research before placing a trade, while others read charts and watch out for trends.
But trades all have one thing in common – they all carry risk. Risk is a key concept to all types of financial trading. No matter what instrument is being traded, who’s trading it or where the trade takes place, balancing potential profit against risk is key to a successful trading strategy.
No matter what instrument is being traded, who’s trading it or where the trade takes place, balancing potential profit against risk is key to a successful trading strategy.
Further, you need to do a comprehensive analysis of the market you want to trade. There are two types of analysis:
Fundamental analysis is concerned with all the factors of a company that could have an impact on the stock price of the company in the future. These include financial statements, management processes, and more. The fundamental value of the firm to spot whether the stock is reasonably priced or not is the main objective.
Technical analysis focuses on the study of financial charts – and using indicators and other tools to identify possible future trends.
|Fundamental analysis||Technical analysis|
|Future profits outlook||Price charts|
Trading vs investing: What’s the difference?
The difference between trading and investing lies in the means of making a profit and whether you take ownership of the asset. Traders attempt to profit from buying low and selling high (going long) or selling high and buying low (going short), usually over the short or medium term.
Investors will also attempt to profit Investors will also attempt to profit from buying shares at a low price and selling high, but over a longer term. They may also aim to earn income in the form of a dividend.
What are the ways you can trade in the UK?
The most popular methods in the UK include spread betting and CFD trading, while investors can opt for share dealing. When you trade derivatives, you do not own the physical asset, but when you deal in shares, you own them.
Spread betting is a popular derivative product you can use to speculate on financial markets – such as forex, indices, commodities or shares – without taking ownership of the underlying asset. Instead, you’d be placing a bet (amount per point of movement) on whether you think the price will rise or fall.
When trading CFDs, you’re speculate on the underlying price of an asset – like shares, indices, forex, and more – on a trading platform like ours. Your profit or loss will be based on the difference between the opening and the closing price. While you’re exposed to price movements of said assets, you don't get to take ownership of them.
Spot trading, futures and options
- Spot trading is buying and selling of assets at the current market rate – known as the spot price
- Futures are financial contracts in which two parties – one buyer and one seller – agree to exchange an underlying market for a fixed price at a future date. Futures give the buyer the obligation to buy the underlying market, and the seller the obligation to sell at or before the contract’s expiry
- Options trading is the act of buying and selling options. These are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a set price, if it moves beyond that price within a set time frame
Open an account
You can apply for a spread betting or CFD trading account online. Once we've verified your identity and approved the account, you can add funds using your debit card, PayPal or via bank transfer. If you’d like to try your hand at trading in a risk-free environment, you can open a demo account.
Find an opportunity
Browse over 17,000 markets and make use of our extensive range of tools and resources to find your first trade. Then, choose which market you want to trade based on your experience and risk appetite. All trading involves risk, especially if you’re trading using leverage, which is why you need a risk management strategy to protect against unnecessary losses.
Open and monitor your first trade
Once you’ve completed these steps, you can decide when to enter the market. When you trade with CFDs or spread bets, you can speculate on both rising and falling markets. If you think the price will rise, you would open a position to ‘buy’, and if you think the price will decline, you open a position to ‘sell’.
Your trading decision should be based on your analysis of the market and your trading strategy. You can trade on a variety of platforms, including our award-winning web platform and mobile app.1 You can also utilise our powerful charts to spot trades and stay ahead of the curve.
Financial trading summed up
- Financial trading is about buying and selling assets
- You can trade assets such as forex and shares using derivatives such as spread bets and CFDs
- Financial trading is carried out via an exchange or over the counter
- Companies, individuals, institutions and even governments trade
- We offer more than 17,000 markets to trade, including shares, indices and forex
- The difference between trading and investing lies in the means of making a profit and whether you take ownership of the asset
- To get started with financial trading, you can open an account, research your market, find an opportunity, and then open and monitor your first trade
1 As awarded at the Investors Chronicle and Financial Times Investment and Wealth Management Awards 2018, and at the Professional Trader Awards 2019.
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This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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