The world of online trading is new and exciting. Whether trading foreign exchange, stocks, commodities, physical goods or a plethora of other options, there seems to be opportunity for everyone.
To understand trading online, we need to look at what trading fundamentally means.
Trading is the exchange of one item for another. Today as we use money, we trade by exchanging money for items. Trading in financial markets is the same. Take for example, buying shares of a company. When you buy shares, you actually buy a part of that company. So if the company grows, makes a large profit, or brings out a new product, its shares will become more valuable. The person who bought these shares can now sell them to someone else for a higher price and make a profit.
Why do these share prices go up?
The answer lies in the concept of supply and demand. To explain this we’re going to use the simple example of going to a market to buy an apple. Let’s say you’re in a market and there are ten apples left on a stall. Although this is the only place where you can buy them, if you are the only person in the market, and you only want one, then the market stall owner will most likely sell it to you at a low price to make sure that he makes a sale.
Now let’s say that more people suddenly enter the market and they all want apples. The market stall owner may put up the price because he knows that there is more demand than supply. He also knows that his customers would be willing to pay more just to make sure they get the apples instead of someone else getting them first. If these customers are willing to pay more and more, than the price of those apples are likely to continue to go up and up. Now, if the price of those apples reaches a level where the customers think they’re too expensive, then the price will stop rising, and they will come back down again to an acceptable level. At this point it could be said that the apples have reached market price. The market price is level at which the market store owner and the customers agree on what is an acceptable price for them both.
But things don’t stay like this forever. If the supply of apples increases the price will likely go down again. Take, for instance, another market stall owner coming into the market offering more apples. His strategy to get into the market will be to offer apples at a lower price. More and more people will buy apples from a new stall and so the first one will have to reduce its price in order to compete. The price of apples can stay like this for a while, or change, depending on the balance between supply and demand.
So how does this apply to the financial markets?
The concept of supply and demand is exactly the same in the financial world. In the financial markets, the customers are the traders, and they’re buying and selling shares of companies. If more people want to buy the shares because the company posted great results and it’s paying out some of its profits to shareholders, then the price of those shares will go up. This is because the demand for them will go up. You can sell those shares to other traders to buy them and by doing so you will make money.
For a long time, financial trading was done purely between banks and other financial institutions. This meant that trading in financial markets was closed to anyone outside this circle.
Today, you can also participate thanks to the development of the internet. Online trading is essentially using the internet to trade. Almost anything is traded online, including stocks, currencies, commodities, physical goods, and a whole host of other things. If something can be traded, it will be traded.
We have all been trading in our day to day lives without even thinking about it. The market is open to you and you can also learn to trade online. All you need to do is choose the appropriate platform, such as CMC Markets, open an account, and start trading whatever option you prefer.