That’s How Internet Trading Actually Works

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Everything is online, and the financial market is not an exclusion. You don’t have to wear a suit and take a cab to Wall street to conduct your operations. Just be wherever you feel comfortable and have access to the web. It’s not a privilege; it’s how things work. You can choose stock trading, commodities, forex, online CFDs trading, or all of them, but you should first realize how trading on the Internet actually works. Investous.com experts have kindly explained it below:

That’s How Internet Trading Actually Works

The Simple Principle

Although being a trader is very complicated and requires extensive knowledge and analytical skills, the core principle behind the whole process is quite simple. Online platforms provide traders with remote access to their financial instruments and allow conducting buying and selling operations online. The software substitutes physical financial instruments with digital items that have the same value. If that’s not clear enough, imagine your bank savings account where you have brought $1,000 in cash. You don’t have this money in your wallet anymore, but you can access them via the internet banking app. The same happens with financial instruments on the market.

More on Financial Instruments

There are two main types of financial instruments:

  • Cach instruments – the value of such instruments is dictated by the market. They include securities, deposits, and loans.
  • Derivative instruments – the value of these instruments is based on the value of particular underlying components, including assets, indices, or interest rates.

You should also know about two asset classes that split all the instruments into debt-based and equity-based ones. The first type includes short-term instruments that last less than a year (deposits, certificates of deposit, short-term interest rate futures, OTC derivatives) and long-term (bonds, loans, bond futures, options on bond futures, interest rate swaps, exotic derivatives, etc.). Equity-based instruments can include stocks, stock options, equity futures, and exotic derivatives.

Trading Accounts

To become a trader, you have to create yourself a trading account on an authorized trading platform. Platforms offer broker services, which are essential for a successful trading campaign. Once you find a platform and a broker you trust, you can open an account. You also have to comply with several requirements to be allowed to own an account. They include:

  • Proof of residence – utility bill, bank statement, address registration certificates, driving license issued within the last 6 months, etc.
  • Passport or another valid ID.

In most cases, you will need one of the listed.

Online Stock Trading

All companies that came through IPO, sell their stocks to investors (aka anyone who can afford them) who have trading accounts. By buying a stock, you become an owner of a certain part of the company. Originally, the process required you to contact a broker, who contacted the stock exchange to accomplish your purchase for a commission. Today, brokers are electronic mediators that charge a fee for contacting you with the stock exchange, and it happens much faster.

Online Forex Trading

Forex trading platforms let you buy and sell currencies in order to earn money on the difference between the initial price for the currency and the selling price. Positive and negative trends can frequently fluctuate within 24 hours, so it’s important to have extensive experience in the niche to understand them, be able to predict potential changes, and make a profit out of them.

Currencies are traded in relation to other currencies. For example, you can trade USD-EUR pairs, CAD-GBP, or any other. Some of them are historically more stable than others, but it’s impossible to earn if you don’t realize the current context of each pair you trade.

Online forex trading involves the use of specific trading platforms that are usually separated from stock trading and other financial instruments. However, it’s not a rule.

More to Learn

While this is only a brief overview of the online trading market and its structure, you should take time and dig into various kinds of financial instruments, broker types, and trading platforms to understand in which direction you have to move. The market is diverse and has room for every type of personality, starting budget, and education. It’s only about your willingness to become part of the largest financial industry.

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