What is Trading?
In simple terms, trading is the process whereby we regularly buy financial products, primarily in a market (more officially referred to as an exchange), and then sell them later for a higher price. This simple concept makes a lot of sense and is probably the main reason why people generally think that trading is easy money.
The financial product that we buy and sell may be stock in a company, a futures contract or even a foreign currency, for example. Many people don’t know that many markets offer the opportunity to take advantage of and financially benefit from a falling price as well. This is often referred to as trading ‘short’, as opposed to the aforementioned and more commonly known ‘long’ trading.
Trading can be a very exciting and worthwhile endeavour and there are several attractions for most people (not including ‘making money’ which is obvious).
Some of the advantages of trading include:
- Self employed – you are your own boss
- Geographical freedom – technological advances are making this easier every day
- Minimal capital outlay – compare this with purchasing a franchise or establishing a new retail store in your nearest shopping complex.
- Unlimited potential for profit – financial freedom is what most traders aim for
- Flexibility with time – you choose when you trade and when you don’t
- Almost anyone can do it – if you are old enough (usually 18 or 21), you can open a trading account and begin
There are of course some disadvantages which include:
- No guaranteed success – many people don’t make money trading
- Can be stressful and emotional – when you are ‘playing’ with your own money, this is almost inevitable
- Solitary existence – trading can be a very lonely profession
- Takes time – like many endeavours, consistently profitable trading takes time. I list this as a disadvantage because I believe many newcomers don’t recognise this, nor do they fully appreciate what is required to develop the skills and attributes for successful trading.
There is one thing you need to be aware of however. Trading has a greater potential for reward than investing but with that extra potential for reward is greater risk. Those who trade well have been well educated and prepared. Very seldom does somebody start trading and make money from day one. Often you will hear the saying ‘Only Educated Traders Survive’.