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1. What Is Trading?

What is trading

Track Course Progression:

 1 - What is Trading

Introduction

Right Ladies and Gents - this is the beginning! This is where your trading journey starts.

 

Today’s video answers the first question you are going to be asked when you tell people about your new hobby - what is trading?

 

Beyond some vague Gordon Gekko influenced ideas, most people have no real clue what trading is.

 

Any new undertaking will naturally come with jargon. We will try and avoid using trading language without explaining what we mean, but sometimes we will need to leave explanations until a later date to ensure the flow of the lesson continues.

 

So, let’s get into it.

 

Overview

At the highest level, the word ‘Trading’ itself is partly jargon. Not everyone will actually understand what trading is and what it isn’t.

 

Today’s lesson, therefore, starts with a definition.

 

Trading Defined

Trading is the attempt to profit from price movement.

 

Chart Explained

This is a pretend chart that we created to illustrate this point. At this exact point in time you can choose to either ‘Buy’, Sell or do nothing.

If you choose to buy here and the price goes up then you will make money. If you had chosen to sell at this point and the price had gone up as indicated, you would have lost money.

Equally, at this time, you may have chosen to sell. Had the price gone down, instead of up, then you would have made money. But if you had chosen to buy and the price went down as indicated you would have lost money.

Of course there is always the option to do nothing. And as you will learn, the art of sitting on your hands is one of the finest skills a trader can learn!

 

We will cover the details of how you buy and sell financial products later in this course, but suffice to say that trading is a two way street.

 

You can Buy - known as going Long - or Sell - known as going Short - and you profit if price goes your way and lose if it goes the the wrong way!

 

It can be confusing to understand how you can sell a product you don’t own and make money when the price goes down, but don’t worry, we’ll explain that later!

 

The prices themselves move because of the universal ‘laws’ of supply and demand. If more people want to buy, the price goes up. If more people want to sell, the price goes down.

 

Having defined what it means to trade, and understanding that you can both buy and sell and make money from the future price movement, we need to address the question of what it is that you can buy and sell.

 

What You Can Trade

 

There are a number of different products that you can trade. We are only going to touch on the basic products here - what people in financial circles often refer to as ‘vanilla’ products. There is a whole world of complicated financial products out there that we don’t need to get into now.

 

Shares Explained

 

The one that most people will be familiar with is probably shares. Sometimes also known as stocks or equities. If you buy a share in a company then you own a bit of that company. You have the right to partake in the benefits of ownership such as the profits of that company.

 

One definition of a ‘share’ that we like is “One of the equal parts into which a company’s capital is divided entitling the holder to a proportion of the profits”.

 

Commodities Explained

 

There are numerous commodities you can trade. Too numerous to mention. A commodity is a ‘raw material or primary agricultural product that can be sold’.

 

So you don’t refer to your wedding ring or sunday roast as a commoditiy. But the  Gold or Pork Belly products you can sell in the market are referred to as commodities.

 

Yes, you can trade Pork Bellies. Commodities trading originated with the need for farmers to secure a price for their produce that they could guarantee regardless of future weather or trading conditions. So there are a number of products out there that may seem weird or wonderful to the uninitiated, but are actually very big business.

 

Forex Explained

 

The third major asset class you are likely to encounter is Forex. Also known as FX or Foreign Exchnage, or simply Currencies trading.

 

Forex is a contraction of the words Foreign Exchange. Foreign Exchange itself is a misnomer as there is no centralised exchange (like there is the London Stock Exchange for Shares or The Chicago Mercantile Exchange for commodities).

 

Rather Forex trading is undertaken between two parties who want to trade with each other. These may be banks, hedge funds or traders like you and I. There are complex electronic systems that enable this to happen without a central exchange. This is known as Over the Counter of OTC trading.

 

Forex is it’s on world and operates in an entirely different way to other financial products. This presents some challenges, but mostly it gives us a lot of opportunities.

 

For individual traders like you and I - who are often referred to as Retail Traders - the Forex market has a much lower barrier to entry than other markets. Both in terms of money (you can get started with a few hundred pounds) to the technology - you can do it from any internet connected computer or laptop.

 

The stock exchanges typically operate in business hours - not ideal for trading if you have a job!

 

As a result of these advantages and other reasons we will cover later, we trade Forex specifically and this course has been designed with Forex traders in mind. If you are just starting in trading and looking for a market to trade, we recommend Forex and this video course is the perfect place to get started!

A lot of people are unsure of the difference between trading and investing. This is the question that we need to answer next

 

Trading vs Investing

There is no magic dividing line between trading and investing; they are in many ways different sides of the same coin. Some people may disagree with the differences we have highlighted here, but there is no hard and fast truth.

In both trading and investing you are buying or selling a financial product with a view to profiting from future price change. There are some complex strategies where this may not be the case, but don’t worry about that for now.

 

There are some key accepted differences.

 

When people talk of investing they are typically talking about buying shares that they plan to hold for the long term. There are many different strategies, but largely if someone tells you they’ve invested in BP shares, they probably aren’t planning on selling them later that day.

 

With trading, the timeframes can be much shorter. Traders may hold a position for weeks or months, perhaps years, but equally they may hold it for days, hours, even milliseconds.

 

A trader is likely to buy and sell frequently, often many times in a day, but it could be a few times a month. Whereas it is not uncommon for an investor to buy shares in a company and hold them until the day they die, a bit like our bloke on the bench here.

 

An active trader i.e. someone who trades frequently, is typically looking for higher returns that an investor. If he makes less money than he could have just buying a selection of the biggest companies in the country, then he won’t be happy.

 

However, with the desire to make larger gains inevitably comes a need to take on greater risk. Risk is the word used to define the likelihood and magnitude of your losses. If you are an investor who buys ten Blue Chip stocks (that is, Big, solid companies) then  you are unlikely to lose all of your money, or even half or a third. It would take a ginormous global financial disaster to wipe half the value off your investment.

 

However, there are many, many traders who lose 50% or more of their money in a year. Even good traders who continue to have successful careers.

 

You can limit the risk in trading, and I would argue that when done sensibly you don’t need to risk losing anywhere near 50%, but the point still stands.

 

Trading is a much broader field that investing. If someone buys or sells currencies or commodities it is highly likely that they would describe themselves as trading not investing. Even if they bought Coffee Futures and held them for three years, they’d probably call it a long term trade.

 

Investing is usually a term that refers to long term buying of shares, or perhaps other long term assets like property.

 

You can also trade shares. If you have a short or medium term approach to buying shares, where you aren’t planning on holding them for months to years, and where you are primarily buying or selling them to gain from share price movement rather than dividend, then you are a trader, not an investor.

 

However, despite its broader nature, trading is often a more specific approach. What I mean is that traders will haves detailed strategies that they want to use, and these can be quite complex. They may use fundamental or technical analysis as well as potentially research reports and complex financial modelling, or all of it put together!

 

Investing is usually what we would call a ‘long only’ approach.

 

If you were to sell short BP shares because you thought the price was going down, you wouldn’t say that you were ‘investing’ in BP; you are making a short trade. If you bought BP shares i.e. went Long and held them for 10 years, you have invested in BP.

 

Don’t get hung up on the difference here, suffice to say that everything we will be talking about in this course falls into the trading category.

 

 

End Of Lesson

That is the end of our first lesson. I hope you have enjoyed it and learned something!

 

The whole thing can seem overwhelming but we will cover a lot of this ground again in subsequent videos and I guarantee you that you will come to understand it all with time.

 

In the video we defined what we meant by trading, looked at the products that you can trade including shares, commodities and Forex. We explained why we are going to focus on Forex due to the benefits and opportunities of this market for retail traders like all of us. We then compared trading to investing and demonstrated why we are going to focus on trading.

 

Having explained what trading IS, in the next video we will be explaining what trading IS NOT!

 

See you there in a few seconds!

 

Two Blokes Trading

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