Introduction to Trading

What is Trading? Why do we do it? What does it involve?

Trading is the buying and selling of securities, such as stocks, bonds, currencies and commodities.

This is in contrast to investing, which suggests a buy-and-hold strategy, and is generally over the long-term.

When we trade, we move into and out of financial instruments regularly. Some traders take only a few trades a year, while others may take multiple trades per day, or even per hour. It can be discretionary, relying on an individuals judgment, or automated, taking place at the behest of an algorithm.

You may have heard of traders going 'long,' or 'short.' Long can be substituted for buy, and Short with sell. They are not identical, however. A trader does not often own the underlying asset. For example, If I want to speculate on the price of oil, I would not buy physical barrels of oil - I would go long a contract of oil. Financial engineering has made it so we can trade a 'derivative' of oil... that is, a contract representing oil, and which is pegged to the price of oil, but is settled in cash.

This concept is the same for all commodities, stock indexes, and cryptocurrencies. Instead of buying the actual asset, we long or short a derivative of that asset. By doing so, we can speculate on the price of the asset without any of the hassle of logistics associated with delivery etc.