What is trading?

“Trading” is the oldest form of commerce, and forms the basis of our economic system. It involves “trading” one thing for something else. Food could be traded for a tool, land could be traded for cattle, or raw materials (metal ore for example) could be traded for a finished product (a sword for instance).

From a financial, purely profit-oriented perspective, trading is acquiring an item (either by buying, growing or making it) and exchanging it for an item of equal or higher value (money or other items).

What are the different types of trading in modern times?

To fully understand “what is trading” in the modern era and how it affects the economy, you need to have an idea about the different types of “trades”.

In modern times, trading has continued to form the backbone of commerce and can be found across the entire economic spectrum. Some of the “trades” you can find in our current economy are:

Services Trade

If you need something done that you cannot do yourself or need expert advice, you hire someone to do it for you. In modern society, you trade “money” in exchange for these services.

Services can be divided further into professional services (think engineers, architects, accountants and lawyers), trade services (plumbers, electricians, and carpenters) and personal services (hairstylists or Uber drivers are examples).

Deloitte has a great article on how services are becoming increasingly important to world economies and world economic growth.

In the United States, the “services” share of Gross Domestic Product (also known as GDP) has grown while the “industry” (manufacturing) share has declined. In 1997, the services sector value added to GDP was 74.7% and it had grown to 78.9% in 2015. During that same time period, “industry” had fallen from 23.9% in 1997 to 20% in 2015.

Retail Trade

What is “retail trade”?

Basically, “retail trade” is selling merchandise. Retailers open stores in malls, free-standing buildings and online to sell their goods. The retailer buys the item for a lower price than they sell it for in their store. The difference (minus expenses) makes up the profit for the business.

Retail trade is a hugely competitive market. Retailers are constantly trying to underprice each other, or offer the customer a better experience. By leveraging the power and convenience of the internet, companies such as Amazon have been able to put significant pressure on “brick and mortar” retailers. This transformation of retailing (also known as the “retail apocalypse”)  has lead to a restructuring in the retail industry, with many traditional firms declaring bankruptcy (Toys “R” Us and Sports Authority are examples) as online retailing has surged to new heights. Wikipedia maintains an extensive list of affected retailers. The number and prestige of these failing retailers will surprise you.

The internet has given prospective retailers the ability to open an online ecommerce business for pennies on the dollar compared to traditional retail. You can start and program an online storefront easily with WordPress and WooCommerce, source goods from international suppliers such as Alibaba, and handle shipping and fulfillment from the comfort of your home office. Expensive leases for storefronts and warehouses, along with all of the traditional infrastructure, is not needed.

Without all of that overhead, you can deliver a product at a price point that traditional retailers cannot touch (hence the “retail apocalypse”).

International Trade

International trade is the exchange of goods that cross international borders. The trader purchases goods in one country, imports them into another country, and then hopefully sells the goods for a profit.

The China – US trade relationship is an example of international trade. Unfortunately, this relationship is one-sided in that China protects its manufacturing (through regulation and tariffs) and the US companies are seeking to reduce costs to their customers by moving manufacturing to China.

The “retail trade” example above using ecommerce, drop shipping and the Chinese supplier Alibaba is a perfect example of the combination of retail trade with international trade.

Financial Instruments

Trading financial instruments is probably the best known form of “trading” in modern society. People trade stocks, bonds, loans, options, futures, and foreign exchange in the financial markets 24/7 around the world through their brokerage accounts.

Advances in both computing power, internet connection speeds and real-time news availability has enabled the individual financial trader unprecedented access to financial markets. Individual traders are even using artificial intelligence to make trades and plan trading strategies.

Commodities

The commodity market trades in the primary economic sector, not in manufactured products.

What is the “primary economic sector”? In a nutshell, the primary economic sector  of the economy includes any industry that is involved in the extraction or exploitation of natural resources. Examples of these “natural resources” industries are farming, forestry, oil and gas, mining or fishing.

What commodities are traded?

Wikipedia maintains a great list of traded commodities here, but some of the big ones you are probably familiar with are: Gold, Oil, Natural Gas, Sugar and Cattle. The traded price of these items directly affects the price that you (as the consumer) pay at the gas pump or the grocery store.

Some of the larger brokerages allow commodity trading (also known as futures trading) alongside stock, bond and FOREX (foreign exchange) trading. There are some specialized futures trading brokers that add additional trading enhancements for commodity traders.

What is Trading? My Thoughts on Leverage and Trading.

So, what is trading?

Trading as a concept forms the backbone of all commerce. Trading businesses include almost every company and industry. All of the business concepts on Levered Income include some form of “trade”, whether it be renting an apartment to a family, renting a commercial space to a business, ecommerce stores, affiliate marketing, selling domain names, cryptocurrency mining or “day trading” financial instruments.

Trading is a profession. Trading is a business. Trading is NOT an investment.

One thing that I want to clarify is that “trading” financial markets is not the same as investing in financial markets.

When you invest your money, your money is working for you. You buy a piece of a company and you get a percentage of the profit delivered to you in the form of a dividend.

When you trade, you are using your money as a tool (along with analysis programs, trading robots and artificial intelligence) to compete against other traders. You are working, but you are leveraging these tools to enhance your income.

The failure rate in financial trading is high. Looking at FOREX specifically, an average of 77% of retail FOREX traders lose money. Brokers within that average range go from 65% losing retail accounts to 89% losing retail accounts.

Those losing odds look poor for the trader when viewed alone. However, starting any new business is risky. For example, 60% of restaurants fail within the first year and 80% close by year 5. That is a 4 in 5 chance of failure for starting a restaurant – a higher failure rate than the average FOREX trader!

Levered Income focuses on the things that enhance the chances of success and reduce the risk of failure.

How do you reduce risk? Leverage your efforts. Focus on routines, tools, learning and processes to increase the odds of your success. Whether it be leveraging your marketing efforts using social media to get more customers through the door of your restaurant, or by using trading tools to remove some of the emotion from your FOREX trading, try to get a little better every day.

Eventually you will be at the right place at the right time, if you are there every day.