The Trade Lifecycle: Behind the Scenes of the Trading Process, 2nd Edition

Chapter 1 Trading

In this chapter we introduce the concept of trading which underpins the whole book and go on to look at factors influencing trading, market participants, how trading occurs and related topics.

1.1 How and why do people trade?

People engage in trade primarily for one or more of the following reasons:

• Require more or less of a product

  We go shopping because we need things. The same is true of financial products. One person buys something that another person has in surplus and is prepared to sell.

• To make profit

  If someone anticipates that he can buy for less than he can sell and has the ability to hold a product long enough to take advantage of the price differential, he trades.

• To remove risk

  Sometimes we need protection. We are worried that future events may cause our position to deteriorate and we therefore buy or sell to reduce our risk. The ship is safe, fully loaded in port today, but how will it fare exposed to the open sea tomorrow?

1.2 Factors affecting trade

In order to understand trading we will proceed to discuss the motivation behind why trading occurs.

Product appetite

Everybody wants to buy as cheaply as possible, but some people have a greater need for a product and will be willing to pay more for it. Our appetite for a product will determine the price at which we buy. Conversely, our desire to divest ourselves of a product will affect the price at which we are prepared to sell.

Risk appetite

Risk is not necessarily an undesirable ...