From the beginning of mankind, humans are exchanging goods and services with each other for survival. Around the world, this activity is known as trading. It is a surprising fact that this process is only limited to humans.
Whenever anyone buys or sells anything, it means the person is trading the item for something. The item can be goods or services. It is a beneficiary process for everyone, where both parties gain something from another. Afar everyday buying and selling, trading can be a quite complicated process in the business world. Let’s take a look at how trading works and the advantages and disadvantages associated with it.
Key Takeaways
- Trading is buying and selling securities such as stocks, bonds, and commodities to make a profit.
- This process involves analyzing market trends, evaluating risk, and making informed decisions based on current and historical data.
- Trading can occur on various platforms, including stock exchanges, online trading platforms, and brokers.
How does it work?
Trading happens between multiple people or business entities. This process occurs with mutual understanding, where one party exchanges goods or services for a certain price. Most of the time, this exchange happens for money. Beyond everyday exchange, trading happens at different scales. For this reason, trading can be classified into different types, including.
- Stock trading
With this trading process, people buy and sell shares of any certain business organization. Here the stock owner owns a piece of the business. The value of the share price can go up or down. In every country, there is a defined stock exchange present, where people can do this trading.
- Options trading
An option is a contractual arrangement that gives the buyer the right to purchase anything in advance. With this financial exchange process, people can buy and sell underlying instrument like an ETF, security, or index. Just like the share market the prices of ETF, security, or index fluctuate over time.
- Currency trading
Currency trading is also known as Forex trading. Here one currency is traded against another. According to an estimate, the currency market is the largest decentralized market in the world. This market also determines the price of all currencies of the world.
- International trading
With this type of trading, any business entity can trade outside of the country. Generally, these types of business entities are called multinational companies. They follow the trading rules and regulations of both countries and settle all trade related disputes in the international trade commission.
Advantages of trading
Trading not only brings prosperity but also encourages social development in many ways. A person can multiply his earning by trading at the stock market, option, or through currency trading. It is also an effective way of exchanging goods and services. Many developments are possible in society with fair and legal trading. The business of trading also employs thousands of people and allows them to earn for living. Trading also generates revenue for the government through taxation. Later the government uses this money for public development.
Disadvantages of trading
Trading always involves some risk with it. The trader can have a financial loss if he does not trade vigilantly. The trader always needs to keep himself updated with the market condition and need to anticipate future market behaviour in advance. Illegal and unfair trading can also bring disaster to the market economy.
- https://journals.sagepub.com/doi/full/10.1177/002224296402800307
- https://onlinelibrary.wiley.com/doi/abs/10.1111/0022-1082.00335
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
