We’ve all been familiar with the basics of trading since childhood. Want some candy? You go to the store, pay money, and get what you want. That’s a simple example of an exchange — in other words, trading.
Not too complicated, right? This means we all already have a basic understanding of trading. Now it’s time to figure out how it works in financial markets.
Fundamental Basics
At its core, trading is an exchange. In everyday life, it’s an exchange of money for goods or services.
In financial markets, the principle is the same, but the “goods” are different:
- company stocks (ownership shares),
- currencies,
- commodities and raw materials,
- cryptocurrencies.
For example, when you buy a company’s stock, you become a co-owner of its capital. If the company grows, its stock price increases, and you can sell it at a higher price to make a profit. The higher the price, the greater the earning potential.
Why do stock prices go up?
Because the balance of supply and demand changes. When more people want to buy an asset, its price goes up.
How do supply and demand work?
When demand grows — prices rise.
Imagine: one seller has 10 peaches priced at \$1 each. A buyer comes for two peaches — supply exceeds demand, and the price stays stable.
But then 10 buyers arrive, each wanting several peaches. Demand exceeds supply. The seller raises the price to \$2. They still buy, so he raises it to \$4. But now buyers aren’t happy and stop purchasing. The seller lowers the price to \$3 to attract them again.
When supply grows — prices fall.
Now a second seller shows up with a large basket of peaches, offering them at \$2. Buyers flock to him. The first seller must lower his price to stay competitive.
This is how market value is formed — a price that satisfies both sides.
How does this work in financial markets?
Exactly the same way!
If a company is growing, its profits and dividends increase — investor interest rises, demand for its stock grows, and so does its price.
If problems arise or competition strengthens — demand drops, and so does the price.
What is online trading?
Online trading is trading on financial markets via the Internet.