| Updated: October 23, 2025Introduction to Trading and Speculative Markets
This lesson will cover the following
- The process of trading
- The concept of financial instruments trading
- Features of speculative markets
What does the concept of ‘trading’ stand for?
Since the dawn of society, people have almost always been involved in a process simply called ‘exchange’, or ‘trade’—a process that involves at least two parties. One party is usually obliged to deliver a commodity, service or good at a specific value to the other party, and vice versa: the second party delivers a commodity, service or good of equivalent value to the first. In most cases, the parties engaged in such exchanges (or transactions, or trades, if you prefer) are individuals.
In order to facilitate the trading process, most societies, as they evolve, identify a specific commodity to be used as a unified measure of the value of goods available on the market. This commodity is what societies have come to call ‘money’.
Example
Let us consider an example of a so-called ‘trading process’. If the US dollar were to fulfil the primary function of money as a means of exchange, individuals might, for instance, trade fruit for vegetables. They would sell fruit for US dollars at a rate of 1 lb of fruit for 1 US dollar. The US dollars could then be exchanged for vegetables under new terms—1 lb of vegetables for 0.50 US dollars.
These two values represent the terms of trading fruit for vegetables, or the so-called ‘relative values’; thus, individuals would trade 1 lb of fruit for 2 lbs of vegetables.
The concept of money, to a great extent, facilitates trading by reducing transaction costs. If a nation, for example, produces 100 different types of commodity and trading is conducted without the intermediation of money (barter), the result would be 4,950 different price ratios. We reach this conclusion using the simple calculation: [(100*100-100)/2].
By contrast, once money is introduced, the number of prices required to cover trading in 100 different commodities is exactly 100.
- Trade Forex
- Trade Crypto
- Trade Stocks
- Regulation: NFA
- Leverage: Day Margin
- Min Deposit: $100
What do we mean by ‘financial instrument trading’?
When we talk about financial instrument trading, we generally refer to situations in which one form of money is exchanged for another between the two parties in a given deal. In most cases, ‘financial instrument trading’ refers to trading different currencies worldwide or to instruments traded in the money market that are almost as liquid as money itself.
Many investment decisions in the markets are closely related to the trade-off between money today and money in the future. In most cases, the amount of money to be obtained in the future remains unknown. Thus, we are dealing with two crucial categories involved in trading—time and uncertainty—which are usually encapsulated by the concept of risk.
At the same time, predetermined conventions can allow one party to make a decision at some moment in the future that will affect the subsequent exchange of money. In such cases we refer to so-called options contracts, which we shall discuss later.
Another key factor in financial instrument trading is the availability—or lack—of information, which can either reduce or increase uncertainty about future events.
These four categories—time, risk, the availability of options, and the availability of information—are closely related to what are known as speculative markets.
Speculation and the nature of speculative markets
In general, when we say that we speculate, we mean that we engage in risk-on financial transactions with the sole purpose of profiting from short- or medium-term fluctuations in the market value of a tradable good—such as a financial instrument—rather than seeking gains from the underlying financial attributes inherent in the instrument, such as long-term capital appreciation, interest, or dividends.
A speculator pays little attention to the fundamental value of a security (or instrument) and instead focuses almost entirely on price movements. We shall examine the behaviour of these market players at a later stage.
Speculation is particularly associated with markets where instruments such as stocks, bonds, commodities, currencies and derivatives (futures, forward rate agreements, options, swaps and swaptions) are traded, as well as with markets for fine art, collectibles and real estate.
The appearance of the stock-ticker machine in 1867 removed the need for traders to be physically present on the floor of an exchange, and speculation in stocks underwent dramatic expansion until the end of the 1920s. Another contributing factor was the rising number of shareholders—from about 4.4 million in 1900 to roughly 26 million in 1932.
Speculative markets have four distinct features:
1) An investment in these markets produces a positive net cash flow within a specific period. A common feature of the instruments (commodities) traded in these markets is their durability—they are not consumed immediately. A capital investment (in corporate shares or in corporate and government bonds), by contrast, usually produces returns over the longer term in the form of dividends, bond interest and so on.
2) In speculative markets, investors are able to trade relatively homogeneous instruments, or instruments that can be traded by means of standardised contracts, such as futures.
For example, corn is a heterogeneous commodity because it comes in various varieties and qualities. However, corn futures are standardised in terms of type, quality and delivery period, which makes them suitable for trading in speculative markets.
3) Speculative markets are, by definition, organised. They either occupy a specific physical location or are maintained by a computer network.
4) Trading in these markets is usually continuous, and prices are subject to constant change.
When investing in a speculative market, one should recognise that any decision made now depends directly on expectations about future developments.