What is online trading?
At its core, trading is a speculative activity: you're trying to profit from changes in the price of an asset. "Speculative" simply means you're forming a view on whether a price will go up or down, and positioning yourself to benefit if you're right. Because no trade is ever 100% sure, and thus even the best trades realistically can and will end up as losers, risk management is crucial for success.
Travelling and trading
Here's a simple, real-world example that makes the whole idea easy to grasp.
Imagine you're travelling to Sweden with only euros in your pocket. You assumed that, as an EU member, Sweden would accept the euro. But when you spot a shirt priced at 150 SEK, the shop assistant tells you they only take Swedish kronor.
Paying by card is rarely a problem, since banks convert currencies automatically. With cash, though, you'll need to find a bank to exchange your money. Let's say that on the day you arrive, 15 EUR gets you 150 SEK. In other words, the exchange rate is 10 SEK for every 1 EUR.
Money constantly changes in value
Now let's say you don't have time to exchange your money straight away, so you decide to do it later in the week. When you finally get to the bank, you notice that your 15 EUR now buys 170 SEK instead of 150 SEK. The EUR/SEK rate has risen from 10 to roughly 11.3, which means each euro is now worth more kronor. Happy with the better rate, you make the exchange and walk away with 170 SEK.
When you go back to the shop, though, the shirt you wanted has already been sold. So your 170 SEK sits untouched in your wallet for the rest of the trip. As your visit comes to an end, you head back to the bank to convert your kronor into euros.
This time, something annoying happens. Instead of getting 15 EUR back, you only get 14 EUR. The EUR/SEK rate has climbed even further, to around 12.1, so each euro now costs more kronor than before, and your 170 SEK doesn't stretch as far. Over those two weeks, holding kronor while the euro strengthened has quietly cost you 1 EUR.
Without realising it, you've just done a bit of Forex trading, which is the biggest asset class in all financial markets. While trading Forex through a broker, you’re doing the exact same thing, although instead of a physical exchange, it’s happening through a trading platform, and with better prices than a physical exchange would offer.
In short, the goal is to buy an asset when its price is low and sell it when the price is higher. That difference between the lower buying price and the higher selling price is where your profit comes from. And, of course, when the market moves against you, it's also where the loss comes from.
With that foundation in place, let's look at the main markets you can actually trade.
How does online trading work in different markets?
Online trading covers a diverse range of markets and instruments. You might trade currencies, company shares, commodities, or something else entirely. The most commonly traded asset classes are:
- Forex
- Stocks
- Commodities
- Bonds
This isn't a complete list, but these are the instruments most widely used by institutions and individual traders alike. So what does each one actually mean, and how do they differ from one another?
Forex
As the travel example showed, trading currencies is known as Forex trading. The term "Forex" comes from "foreign exchange", and the concept is straightforward: you exchange one currency for another and aim to profit from changes in the rate between them. It's also by far the largest and most liquid market in the world.
Stocks: buying a piece of a company
A stock represents a share of ownership in a company. Companies issue shares for a few different reasons, most often to raise capital for new projects or to broaden their ownership base. When you buy a stock, you own a small piece of that business.
In practice, stock trading works much like Forex. When political or economic events push a share price lower, some traders see an opportunity to buy. Rising demand can then push the price back up, and traders who bought earlier may sell once the price is higher, profiting from the difference.
Commodities: trading natural resources
Commodities are physical goods and raw materials, ranging from precious metals like gold and silver to energy products like oil and gas. In short, anything raw that occurs in a natural state tends to fall into this category. This also includes goods you might not realise are financial assets, such as corn, cotton and even live stock.
Commodity trading follows the same buy-low, sell-high logic as other markets, but the things that drive the price are different. Gold, for example, is strongly tied to inflation and general market sentiment, whereas oil is mostly directed by asset-specific trade flows and geopolitics.
Bonds – the government assets
A bond is a debt instrument. When you buy a bond, you're effectively lending money to the issuer, typically a government or a corporation, which in return agrees to pay you interest over a set period and pay back the original amount when the bond matures.
Bonds trade on a market like any other asset, and their prices rise and fall depending on factors like interest rates and the financial health of the issuer. Traders can buy and sell bonds before they mature to profit from these price movements.