Searching for a trade definition? Trading is the basic activity of all investors or investment services – it’s simply the buying, selling or exchanging of assets. In financial markets, people trade securities such as shares, currencies, commodities and derivatives.
Shares are traded on a stock exchange, while commodities and equities are bought and sold on the trading floor. The general aim is to look for a profit by buying at a lower price and selling at a higher one, usually within a relatively short period of time.
A trader can be anyone from an individual investor to a global institution. Trading can be done directly or via a broker, it can be done in person, on the phone or through an online trading platform.
Where have you heard about trade?
Trading activity on the financial markets is widely seen as a reflection of the health of the world’s economies. People may also ask you if you trade, or talk about their own trading successes or failures. More generally, you’ll probably come across the word trade in conjunction with expressions such as free trade – which has been big in the news since Britain voted to leave the EU in 2016. Free trade is a policy followed by some governments who don’t place any restrictions on trade with other countries.
What you need to know about trade…
Trade involves the transfer of goods or services from one person or organisation to another, often in exchange for money. A network that facilitates trade is called a market. The first form of trade was barter – trading things without the use of money – which involved the direct exchange of goods and services for other goods and services. Then, as fledgling economies developed, precious metals started being used. Today, traders usually negotiate through a medium of exchange – such as money. The invention of money, paper money, credit and non-physical money massively simplified trade.
Trade between two traders is called bilateral trade, while trade between more than two traders is called multilateral trade. In today’s world, trade also sees a complex system of companies attempting to maximise their profits by offering products and services to the market at the lowest possible production cost. International trade relationships have helped develop the global economy, but the introduction of lower tariffs to promote free trade has sometimes disadvantaged markets for local products in developing countries.
Virtual currency – or virtual money – a is a form of unregulated digital money that’s issued and usually controlled by its developers, and used and accepted among members of a virtual community. According to the European Banking Authority, virtual currency is ‘a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a fiat currency, but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically’.
As a trader, one of the key things you can do to boost your chances of success in markets today is to approach trading as a business. A successful trading business needs a strategic plan that includes short and long-term goals, and the amount of capital available for the business. A good trading plan is researched and tested against historic data and in a live market, and is reappraised at regular intervals.
There are two basic ways exchanges execute a trade in markets today: on the exchange floor, and electronically. While there’s a big drive to switch more trading to networks and off the trading floors, these moves are meeting some resistance. NASDAQ was the pioneer in electronic stock trading; the New York Stock Exchange, on the other hand, uses floor traders to make most of its trades. But the NYSE also uses an electronic system called Designated Order Turnaround (DOT), which improves order efficiency by routing orders for listed securities directly to specialists on the trading floor, instead of via a broker.
How does floor trading work? Well here’s a description of a simple trade on, say, the New York Stock Exchange. First, you instruct your broker to buy 1,000 shares of Omnicorp at market. Your broker’s order department sends the order to their floor clerk on the exchange. Then the floor clerk alerts one of the firm’s floor traders who finds another floor trader prepared to sell 1,000 shares of Omnicorp. They agree on a price and complete the deal. The notification process is transmitted back up the line, and your broker tells you the final price. The stock trading process can take several minutes or longer, depending on the stock and the market. A confirmation notice arrives in the mail a few days later.
This has become increasingly popular in recent years. It’s easy to set up an online trading account and start trading shares. All you need for online stock trading is a password and some money in your account. You can also deal over the phone or through a stockbroker. To make a trade, choose the financial instrument you want to buy, look up the price, decide how much you want to spend, and finalise the deal when you’re happy with the quote. You can then track the performance of your investment, and opt to add more assets to your growing portfolio. You may have to pay tax if you make a profit selling shares.
Online trading platforms enable investors to place buy and sell orders, and also to place limit, stop, stop-loss, and stop-limit orders. Such orders are a way for you to manage your investments without having to watch the market 24/7. Online trading platforms have a variety of handy features, such as the facility to check the status of an order, access stock quotes in real-time, and get news on companies you follow. Novice investors can practice with an online stock simulator to get experience of online trading.
One advantage of online trading is that it has lowered costs for investors. To stimulate interest in so-called self-directed investing, brokers charge lower commissions for trades placed online than for those placed over the phone.
Equity trading is the buying and selling of company stock through a major stock exchange such as the NYSE or LSE. An equity trade can be placed by the shares’ owner through a brokerage account, or through an agent or broker. Equity trading firms offer comprehensive market research, trading expertise and unique trading systems. Such firms chiefly exist in the form of hedge funds, trading within a larger investment bank such as Bank of America, JPMorgan or Goldman Sachs.
Currency trading is a 24-hour market that’s only closed from Friday evening to Sunday evening. There are three sessions – the European, Asian and United States trading sessions. While there’s some overlap in these sessions, the main currencies in each market are mostly traded during those market hours. This means that certain currency pairs will have more volume during certain sessions. Traders in dollar-based pairs will find the highest volume in the US trading session.
Currency is traded in lots of various sizes, starting with a micro lot which is 1,000 units of a currency. If a trader’s account is funded in US dollars, a micro lot represents $1,000 of the base currency, the dollar. A mini lot is 10,000 units of base currency, and a standard lot is 100,000 units.
All currency trading is executed in pairs. Unlike the stock market, where you can buy or sell a single stock, in the forex market you must buy one currency and sell another currency. Almost all currencies are priced to the fourth decimal point, with a ‘pip’ or percentage in point being the smallest increment of trade. One pip generally equals 1/100 of 1%.
Finally, however you decide to trade, it’s always worth remembering that the value of securities and commodities can go down as well as up, so you can lose money on trades as well as make money.
Find out more about trade…
Our glossary has lots more information on the workings of the stock market, plus definitions of terms like share, currency, broker and forex.
You might also want to look at a couple of insightful press articles on the subject. In February 2017 The Independent published a ‘Beginners’ guide to currency trading‘, which is a useful entry point for people starting out in forex trading.
In October 2017, around the 30th anniversary of Black Monday, the Financial Times asked: ‘How big is the risk of another Black Monday equities crash?’. The paper suggested that 30 years on, the market is different but has similar characteristics, from high valuations to trading strategies, that could accelerate a sell-off.