Even if you are not into the trading industry, we are sure that you have encountered the term sometime in your life. You might even have done trading without knowing it. Actually, the simple act of buying something in a store is also referred to as trading. The main objective of writing this article is to help you understand trading and to give you an idea of how trading works.
Definition and Principles
The term “trading” in layman term means exchanging one item for cash or for another item. In the financial markets, trading refers to buying or purchasing an item for a specific price and then selling it again at a higher price than the original price so you can profit from it. Some refer to trading as exchanging of items for money or to make it simple buying something. Trading in financial market has the same principle. Consider someone who trades shares. The act of trading is referred to as buying shares or a small portion of a company. Once the value of shares increases, they can earn from it by offering them again to others at a higher cost. This is known as trading. You purchase something for a specific price and offer it to others for a higher value, thus you earn from it and vice versa.
You might be wondering why the value of shares increases? The answer is easy: the value in trading depends on the supply and demand, thus the more demand for a particular supply, the higher the demand and the more people are willing to purchase it.
The Relation of Price and Demand
The value of the item increases depending on its demand. For instance, if a store sells apples and lots of people enter the store, he can increase the cost of each apple because the buyers are willing to pay for it. We can use the buying of food as an example to describe the connection between price and demand. For instance, you are in a store selling apples and there are only 10 left on the basket. And this is the only store that sells apples in the area. If you are the only buyer and you only need some apples, the store owner will probably sell the apple at a reasonable price.
For instance, there are 10 people who enter the store and they are all interested in buying apples. To make sure that they will get the apples that they need before others do, they will purchase the apple no matter how much it will cost them. Therefore, the stall owner can increase the value of the apples, since he is aware that there is more demand for it as compared to its supply.
When the customers find the cost of each apple too expensive, they will stop buying them. The fruit stand owner can stop increasing the cost once he realizes that people have stopped buying his apples because they are too expensive. He also has the option to lower its price, so the people will start purchasing his apples again.
The More Supply Needed the Lower the Price
If there is an increase in demand the price decreases. For instance, if another store owner puts up an apple store, there is now more supply of apples for the people. To make sure the people will buy apples from you, you decided to lower their prices. Suddenly, another store owner decided to join the market and this time he has more supply of apples to offer. This time the supply of apples has increased significantly. The second fruit stand owner who put up an apple stall may sell the apples at a cheaper price as compared to the first store owner to attract more customers. He knows that the customers would prefer to purchase more apples at the lower price.
As a result of this, the first fruit stand owner will be forced to lower the price of his apples. The sudden increase in the apple supply has affected the cost of the apples.
The “market price” is the term given to the price that matches the supply. It is the cost level that both the stall owner and the customers agreed. This goes along with the supply of the apples needed.
Application to the Financial Industries
The idea of supply and demand is similar within the financial market. If a company announces some great outcomes and is paying remarkable dividends, then lots of people want to purchase the company shares. This increases the demand that will result in an increase in share price.
Understanding Online Trading
For many years, financial trading is done mainly electronically between financial and banks institution. It only means that the trading within the financial industry was restricted to those who are outside of the mentioned institutions. Through the help of a high-speed internet, those who want to become involved in trading can do so online. Thus, it is called online trading.
You can trade anything online from stocks, physical goods, commodities, currencies and practically everything you have in mind. At this time, there is no need for you to worry about all these stuff. For now, always remember that if you want to trade something, you can do so online and offline. Among the many markets in financial trading, the forex market is the biggest and the most popular one. There is around $4 trillion worth of currency being traded every day worldwide – this is bigger as compared to any stock exchange in the world.
Online trading is generally the act of buy and sells financial goods via an online trading platform. These schemes are usually provided by internet-based brokers and can be done by any person who wants to try to generate money from the market. The majority of brokers provide different financial products that include commodities, Forex, shares and indices. As mentioned earlier, forex is the most popular in online trading, but you can still perform online trading for shares such as Google or buy and sell commodities like silver or gold.