What is Online Trading?

The internet has revolutionized the way people trade in the financial markets. In the past, trading was mostly conducted within banks and other financial institutions. The internet and the personal computer have made it possible for everyday people to trade from the comfort of their own home.

Nowadays, almost anything can be traded online, from commodities, currencies, indices, shares and treasuries. Actually, if it can be traded, it will be traded.

How Online Trading Works

First, you need to understand what the term “trade” actually means. Simply put, it is exchanging one item for another “something you do on a daily basis, like when you go to the supermarket and purchase an item”. Just like items in the supermarket, commodities, shares, and currencies are being bought and sold on a daily basis in the financial markets.

In the stock market, for example, shares (or stocks) are a slice of a corporation. The corporation issues a set number of, shares for people to buy. When purchased, these people own a part of the company. For example, if a company issues 10,000 shares and you purchase 5,000 of these shares, then you would own half of the company. If the shares increase in value, then you benefit from the growth.

 

Depending on factors like Supply and Demand, you can later sell the shares (hopefully at a higher price) in order to profit from the markets. A basic, yet powerful principle of the financial markets - buy low, sell high.


When you buy a company share, you are essentially the owner of part of the business. Depending on factors like Supply and Demand, you can later sell the shares with the hope of making profits from the market.

Importance of Supply and Demand

Transactions occur in the financial market when the buyer and seller agree on a price. This is the price at which supply matches demand, and it’s known as the “market price”. However, supply and demand forces will primarily influence the price change.

This applies to everyday life, as well. The more the demand, the higher the price. If there is plenty of supply, the prices tend to decrease from the abundance.

For instance, take the 5,000 shares you earlier bought as an example. If there is an increase in their demand and many buyers are willing to purchase the shares. As the owner of the shares, you will be prompted to increase the price and sell them at a higher price than what you initially bought them for. This results in profit.

The higher the demand, the higher the price will go. This means that there are more buyers than sellers. The sellers will be prompted to increase their prices with the aim of maximizing profits.

But if your current increased price seems to be too high for the buyers, the willingness to buy them now reduces, scaring some buyers away. You may be forced to reduce the price depending on availability of a willing buyer.

Alternatively, an increase in supply results to a decrease in price. In the same case scenario of 5,000 shares, if another seller (who had bought the other half of the company) comes into the picture, this means there are two sellers, you and the other seller. Two sellers mean an increase in supply. One of the two sellers will most likely sell the shares at a lower price, thus creating a decrease in price.

Increase in supply leads into a price decrease. This means there are more sellers than buyers. Here, the buyers will reduce the price at which they are willing to buy, with the purpose of maximizing profits.

How to Determine Supply and Demand

Technical and fundamental analysis are conducted to find out what the current supply and demand situation is and predict what it might do in the near future. If traders predict a rise in price, they will buy. If traders think the price is going to fall, they sell.

Traders can "go short" and sell something they don't already own. This can be a difficult concept to understand at first. Think of it like this, you do not own the share; you are just trading the price.

Technical and fundamental analysis are conducted to determine the current situation of the market. This helps in predicting what might or might not happen in the future, thus guiding a trader to make the right decision.

How to Trade in the Financial Markets

In order to buy and sell a financial instrument, such as stocks or currencies, you would usually use an online broker. An online broker is someone who is licensed to place trades through the exchange market. There are many different types of exchange markets. Some of the biggest stock exchanges, for example, include the NYSE, NASDAQ, LSE and the TSE.

Before the emergence of online brokers, placing a trade required one to call a broker, who would then find a price for you through financial institutions or banks. This price would then be entered manually by the broker.

With an online broker, it is a completely different playing field. When trading online you would commonly use a brokers trading platform, where you can place your trade via the broker’s website or downloadable software. The broker will then automatically place your trade and execute your price through an exchange market. This has generally lowered the costs of trading, giving and you complete control over your investments.      

There are many different online brokers to choose from, making the selection process challenging. We make it easier by offering an in-depth “Broker Module.

To trade in Financial Markets, you would usually use an online broker. This is a company licensed to place trades (on your behalf) through exchange markets.

Types of Investors

People who participate in the markets are grouped into two broad categories -- investors and traders.

1. Investors – They tend to buy and hold a stock, for example. This is common with larger corporations. An investor might purchase stocks in IBM, Coca-Cola, or Microsoft and sit on them for 5, 10, 20 years at a time. They are not as concerned about the day-to-day fluctuations and are in it for the long haul. The investors are more interested in the fundamentals of the company, such as their sales, debt to equity ratio, dividends or their P/E ratio.

2. Traders – They tend not to hold on to their trading positions for long. Day traders, particularly, will close out of their positions by the end of the day. They are not interested in how the company does in long, extended periods of time.


Bottom Line

Online trading can be a highly lucrative and rewarding pursuit. Internet access has made it possible to trade from anywhere in the world. The key to success with online trading is education, discipline, patience and experience.

Trading is not a get-quick-rich scheme, and if you want to succeed with online trading you need to be able to establish a trading plan and stick to it. If you can do that, you may find that choosing to start online trading is one of the wisest decisions you make.

 

Summary:

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When you buy a company share, you essentially own part of the business. Depending on factors like supply and demand, you can later sell the shares with the hope of making profits from the market.

 

P

The higher the demand, the higher the price will go. This means that there are more buyers than sellers. The sellers will be prompted to increase their prices with the aim of maximizing profits.

 

P

Increase in supply leads to a price decrease. This means there are more sellers than buyers. In this case, the buyers are likely to reduce the price at which they are willing to buy, with the purpose of maximizing profits.

 

P

Technical and fundamental analysis are conducted to determine the current situation of the market. This helps in predicting what might or might not happen in the future, thus guiding a trader to make the right decision. 

 

P

To trade in financial markets, you usually use an online broker—a company licensed to place trades (on your behalf) through exchange markets.

 

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Comments

#
Monday, March 31, 2014 4:41 PM
Wonderful info! basic and easy to understand. I like the blue comments. Thanks
Community Support
# Community Support
Tuesday, June 10, 2014 3:05 PM
Hello traders,

I would like to welcome you to Tradingfo´s free online trading school and community and thank you for your positive feedback.

We have a team of experienced financial professionals that are here to help, so fire away with any questions that you have.

Don't forget to check out the offers and promotions page to find trading competitions, deposit bonuses, and free money to get you started!

Happy trading,

Ximena

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