Online trading explained as simply as possible
So, as mentioned above, online trading is essentially a speculative financial exchange that gets people different results - some win and some lose. What “speculative” means is that people try to predict if the price of one particular asset is going to increase or decrease. And that’s the whole idea - gains are made through speculation
Traveling and trading
So, how to do trading online for beginners? Here’s the most basic real-life example that will make understanding online trading easier:
Imagine you’re traveling to Sweden and you only have euros with you. You thought that since Sweden is a member of the European Union, it would accept its currency as well. However, as you go into the first clothing store and see 150 kronor price tag on a shirt, you ask a consultant whether they accept euros or not.
Paying with a card is usually not an issue, because banks can convert the currencies very easily, however, if you only have cash, it’s going to be a problem. The only thing you can do is go to the nearest bank and exchange your kronor for euros. For this argument, let’s say that for 15 euros, you can buy 150 kronor. This means that the exchange rate is 10 kronor for 1 euro.
Money constantly changes in value
Let’s now assume that you don’t have time to go to the bank, so you decide to do that later in the week. A week goes by and when you visit the bank, you notice that instead of 150 kronor, you are getting 170 kronor for your 15 euros. This means that for one reason or another, the EUR/SEK exchange rate increased from 10 to 11.3. So, happy with this bargain, you buy 170 kronor.
However, when you visit the shop, the consultant says the shirt you liked is sold. So, your efforts turned out to be in vain. But you decide to keep the money anyway. In a week, your journey to Sweden ends and your 170 kronor has been sitting in your wallet untouched. So, you go back to the same bank to buy euros.
And another weird thing happens. Instead of getting your 15 euros back, you’re actually getting 14. Apparently, the exchange rate of 11.3 in the previous week got even lower to 12.1. So, in two weeks, you lost one euro in this set of exchanges.
So, even though it was accidental, you actually performed Forex trading, one of the forms of trading in general. And that is basically how online trading works too, the difference is that it uses the internet instead of the real banks or other exchanges.
To sum it up, traders tend to buy assets when their prices are low and try to sell them when the price increases. The difference between low buying and high selling prices will then bring a larger payout.
And since we are here, let’s take a look at different types of online trading
How does online trading work in different markets?
Online trading is quite a diverse environment with different markets and industries in it. You can be trading on the currency markets, company shares markets or something else. In fact, here’s the list of the most popular assets that go into the online trading category:
Of course, this is not a complete list because people can pretty much trade with everything they have - or don't have. But official financial institutions and individual traders most commonly use those assets, which is why they are perfect examples for this guide on trading online for beginners. So, what does each of them mean? How are they different from one another?
As you saw in the previous real-life example, trading currencies is called Forex trading. The word “Forex” is derived from two words - Foreign exchange - and is pretty easy to understand: exchanging foreign currencies and getting a payout from it. So, we don’t need to spend a lot of time on that.
Stocks - buying a piece of a company
The next popular asset group is stocks. Stocks are pieces of an individual company that they release on the market. And there are various reasons why they would want to do that: either they want to get some funds for additional projects, or want to increase public participation in company management. The result is: traders are buying a certain share of the company.
And it works pretty much the same way as Forex: when certain events, be it political or economic, lower the prices on stocks, traders usually buy them at large amounts. This, in turn, increases the demand for the asset and boosts the price. And then, when the price is quite high, traders tend to sell their shares. This difference between the lower buying price and higher selling price results in payouts. But you have to remember that sometimes, even this online trading step by step guide and even the most comprehensive knowledge cannot save a trader if luck is against them.
Commodities - natural resource trading for starters
Then comes the next asset group called commodities. They can range from precious metals like gold and silver all the way to oil and gas. In short, everything that’s raw and can be found in a natural state can fit in this category.
Commodity trading is pretty much the same as previous assets, but there are still some differences. The difference is mainly in how the price changes. For example, gold is usually more stable than oil because oil is more connected to global politics and every major change can have a significant influence on its price.
Cryptocurrencies - trading with virtual assets
This next asset is still pretty new to the financial world. Cryptocurrencies are, in nature, currencies that aren’t issued by governments. They are based on the mutual agreement between its users that this digital asset is going to carry some value. And it’s also used in online trading.
The most popular cryptocurrency is called Bitcoin and because of its sudden changes in price, it is considered the most suitable for online trading. But there are a lot of dangers associated with it as well, not to mention the same price changes that can lead people to bankruptcy within hours. So, people usually tend to gain some knowledge about cryptocurrencies or pretty much any other asset before they start trading - online trading for beginners (as well as experienced traders) can often be very risky and while knowledge lowers the chances of financial risk, it still doesn’t remove them completely.
Bonds - the government assets
Governments can also get involved in trading. From time to time, they issue bonds - the financial instruments that traders buy - or more precisely, borrow - from governments or big corporations. They issue bonds for getting additional funds from the public and after some time, they have to return them to the traders.
So, the bond market functions like any other market: the prices go up and down depending on how stable the political or economic situation is in the country. And trading works the same way too.
Derivatives - trading in advance
Trading with derivatives can be somewhat difficult to understand at first. But it’s not too complicated: basically, a derivative is an agreement between two or more sides on a specific asset and its price movement.
This is a more or less convenient form of trading because traders don’t need to buy actual assets. Just agreeing upon the future of price - whether it increases or decreases - is enough to perform a trade. And derivatives can be used for almost every asset, including Forex, commodities, etc.