Who and Why Trade?

A trade occurs in  many means and forms but it boils down to when there is a voluntary exchange of goods and services between two entities, such as consumers, or even companies.

In the past, before the modern day fiat currencies (coins and paper bills) were in circulation, barter trading was the norm. Barter is the act of trading goods or services between two or more parties without the use of money. 

e.g. Adam proposed a trade to Mary; 5 of his apples for 1 of Mary’s sheep

However there are limitations of this system, primarily that there is no standardised measure of value. If there isn’t a “need” for the product or service, no trade will happen. Currency systems were developed to address this issue.

Most countries now use a monetary currency system with fiat currencies backed by the issuing governments, and are subject to theft and devaluation from inflation. In financial markets, trading refers to the buying and selling of securities, commodities or derivatives which we will look into. 

Participants in the financial markets includes from; 

• Speculators or retail traders; like us or you

• Institutional traders; insurance companies, private funds

• Central banks; U.S. Federal Reserve(Fed), Bank of Japan (BOJ), European Central Bank (ECB)

• Corporations; Multinational companies (MNCs)

• Governments

One of the most common reasons to be trading the financial markets is to counter inflation.

Let’s say, If you put all your money under your bed for safekeeping and left it there for a year, the amount of money would not have increased. There would be exactly the same amount of money as you’ve put there. 

Now, physical deterioration aside, the money would in fact, be worth less than the previous year due to inflation;rising cost of living. 

That’s where trading comes into play. Instead of having your money lose value over the years due to inactivity. It can be converted into shares or commodities that have a potential to appreciate in value. But of course, there’s always the risk of it losing value as well. 

It is critical to find balance between risk and the potential rewards with trading the financial markets. There is no hard and fast rule about how to achieve the perfect balance between risk and reward, if you do it modestly, the rewards could be much greater than having your money sitting in the bank (or even under your bed).