The Trade Lifecycle: Behind the Scenes of the Trading Process

1

Trading

1.1 HOW AND WHY DO PEOPLE TRADE?

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

We 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

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 concept. Different people and organisations have a different attitude to risk. Some people make money by owning and managing risk. They are prepared to service other people’s desire to reduce risk. Many trades arise because some people will pay money to reduce risk and others will accept money for taking ...