I want to help beginner traders understand and answer the question, ‘what is trading’. I’m going to explain what trading is in this article, the difference between trading and investing, what types of returns you should expect from trading and how you can get started. Let’s get straight into it.
What is trading? Some basics…
Trading is the buying and selling of equities (shares), commodities, metals, contracts or other types of assets on an exchange. For every buyer, there is a corresponding seller and these buy and sell actions, drive the price and volume in any market. The idea with trading, is that you buy and sell at favorable points on a chart (or based on fundamental data), and the buy and sell happens more quickly typically, when compared to what an investor does. An investor typically buys assets over and over and holds them until they increase in value by a large amount, over a long period of time. Traders can be day traders – people who get in and out of trades within one day, or swing traders – where trades can span over the course of a couple of days or more. I’ve provided a link below to help you understand ‘fundamentals’. Fundamental analysis is the method of inspecting financial statements to try and ascertain the value of a share with a view to buying it low and selling it high!
Fundamental Analysis – Trader Pro – Learn how to Trade the Stock Market
I am also providing you with a link to a structured course which can help you understand how traders decide where to buy or sell based on ‘technical analysis’. Technical analysis is purely based on the patterns forming on a chart (which stem from events and real world scenarios – the patterns can form based on what real people think a share is worth for example):
Learn to trade – Trader Pro – Learn how to Trade the Stock Market
See also the chart analysis section of this blog, here, where you can see me doing this analysis and explaining my thoughts:
Chart analysis – Trader Pro – Learn how to Trade the Stock Market
What types of returns can you make from trading the stock market?
Traders can make 100% return on their capital, in a year. The reality is that different traders make different amounts – but if you are trading, rather than investing, you definitely want to be making more than a regular investment return. You are taking more risk than what you take with investing money in a more straight forward way as an investor, so risk normally goes hand in hand with return (or it should).
So how do these transactions take place?
We cannot answer the question ‘what is trading’ without considering how these transactions come about. Most transactions take place online these days. You can open a broker account to either buy shares and own the shares or you can open a position based on the movement in the price and enter into a ‘contract for difference’. This is where you enter into a contract with the other party, to agree that if the price goes the way you think it will, the other party will pay you xzy amount of money and vice versa. If the price goes against you, you will need to pay them. The other way of trading is via a ‘spread betting’ account. This is like placing a bet on the price movements of the underlying asset and for most intents and purposes, it is treated and seen, as gambling. There are different tax implications for these three different methods of trading, and broker accounts can be opened online to go with any method you believe is right for you.
What else do you need to know when understanding the answer to the question, ‘what is trading’
Some of the types of broker accounts which can be opened (contracts for difference (“CFD”) accounts, and spread betting accounts) include leverage. Leverage is a loan which is offered by the broker to allow you to get into a larger position size than you may otherwise have been able to do. You put a deposit down on the open position, and these accounts are dangerous for a new trader because you can lose more than you put into your account! You should not trade with a margin/leverage account until you have a good understanding of this and how leverage and margin work. There are other articles on this blog explaining how you can manage your risk as a trader, which you may find helpful, as well as explaining margin and leverage:
Risk Management – Trader Pro – Learn how to Trade the Stock Market
I also published a video on YouTube which you may find helpful, on understanding how you can manage risk as a stock market trader:
I’ve also posted a video on YouTube explaining what margin is:
This introductory video on understanding the stock market, may be helpful for people who are new to the markets:
So now you understand the answer to the question, ‘what is trading’, how can you get started?
The best place to start would be by viewing my ‘Structured Course’ playlist on YouTube – which gives you some of the key lessons on how to become a stock market trader (below), and also refer to my blog article here, on how to create a trading plan:
I also recommend you browse the other ‘structured course’ articles on this blog which take you through technical indicators, risk management, understanding the spread and many other things, here:
I hope you found this article on ‘what is trading’ helpful. Perhaps if you did, you can leave a comment below.
Disclaimer!
Nothing on this blog should be taken as financial advice or encouragement for you to enter a trade. You are expected to speak to a financial adviser or carry out your own due diligence before entering any positions. Everything on this blog is made for educational purposes and to equip you with the knowledge you need to be able to make your own financial decisions.
For more great tips and advice on trading the stock market, please visit:
To watch me trade live please visit my patreon page here:
https://www.patreon.com/Traderpro8320
Finally, if you would like to receive a discount on the Trading View charting software I use, please click on the relevant link here:
https://www.tradingview.com/?aff_id=117138
Please note any subscriptions taken via my affiliate link with Trading View may result in me earning a small commission. However, I provide complete transparency on me using Trading View personally – I publish my success on the financial markets via my broker reports and any profits earned were done so by using my own Trading View subscription, so I genuinely do recommend them and have been using the Trading View charts for many years.