Is There an Exchange of a Physical Asset?
Not all investors require the physical delivery of a product. Instead, they buy a product with the expectation that its value will increase and they will be able to sell it for a profit. These investors are called speculators and they are only interested in the changing price of a product. A common term used for this type of trading is ‘Contract For Difference’ (CFD), whereby the speculator takes out a contract and their profit or loss depends on the difference between the price they bought at (purchased) and the price at which they closed (sold). It’s the same as buying a house for £100,000 and in 5 years’ time being able to sell it for £150,000, the difference and profit are £50,000.
Historically, especially before the internet, trading in the financial markets was expensive and unattainable for private investors. These days online trading is so advanced it’s possible for anyone to open a trading account and buy any financial product such as shares, commodities or currencies. Remember, this does not involve physically buying products but merely booking a trade to profit from an increase in price.
Using online trading you can even sell a product that you don’t own! ‘How do I sell a product that I don’t own?’ you might ask! You can use your investment (in your own currency) as a deposit to sell any other product. If you sold a product and its price fell you would profit. Let’s consider the house example again, imagine you sold a house for £200,000 and a year later you were able to buy it back for £100,000, the difference and your profit is £100,000. In this situation you receive a higher amount than you have to pay back. It is the same when you sell on a trading platform. For example, if you hold a trading account in Euros you can place a deposit in Euros to facilitate a trade to sell Crude oil. The trading platform calculates the deposit you must put down based on the amount of oil you want to sell.
In summary, you can speculate on almost any financial product in the world. If you expect the price of that product to increase you would buy it and if you expect the price of the product to decrease you would sell it.
This has been a basic introduction to trading CFDs, read on to get an understanding on some basic definitions.