What is trading? How it works, what it costs and the risks

What is trading? Trading is buying and selling assets such as shares, currencies or crypto to profit from price changes, usually over days, hours or minutes rather than years. It differs from investing in time frame and in cost, because every trade carries costs such as spreads and fees. Most retail traders lose money, and leverage, which means trading with borrowed funds, multiplies those losses. This guide explains how trading works, what it costs, which rules apply in the US and the UK, and what changes when the asset is crypto.

What is trading?

Trading means buying an asset and selling it later, or selling first and buying it back, to profit from the price difference. Your result depends on getting both the direction and the timing right, and on whether the gain is larger than your costs.

Trading vs investing

Traders hold positions for minutes to weeks and act on price moves. Investors hold for years and rely on the long-run value of what they own.

More trades mean more fees. In the US they also mean more taxable events, which we cover in the rules section below.

What you can trade

Common markets are company shares, currency pairs (forex), commodities, indexes and crypto. Beginners should understand one distinction first. In spot trading you buy the asset itself. In derivatives trading, such as CFDs, futures and options, you trade a contract that tracks the price, often with leverage.

Rules differ by country. In the US, crypto spot markets have limited federal oversight, but a federal court held in 2018 that the Commodity Futures Trading Commission (CFTC) has the power to prosecute fraud involving virtual currency. In the UK, firms cannot sell crypto derivatives to retail customers. If you only want to own crypto, read our guide to buying and selling crypto safely.

How a trade works

Buying, selling and orders

A market order fills straight away at the best available price, which can differ from the price you saw when the market moves fast. A limit order fills only at the price you set or better, so it may not fill at all. If you go long, you profit when the price rises. If you go short, you sell first and profit when the price falls.

Spreads and fees

A round trip, buying and then selling, pays costs twice: once on the way in and once on the way out. The spread is the gap between the buying price and the selling price, and fees come on top. The more often you trade, the more these costs add up, and they apply whether the trade wins or loses.

Leverage and margin

Margin is the deposit you put up to open a leveraged position. Leverage lets you hold a position larger than that deposit, because the provider covers the rest. With 5x leverage and before costs, a 10% move against you loses half of your own stake, and a 20% move loses all of it.

In the UK, the Financial Conduct Authority (FCA) limits CFD leverage for retail clients to between 30:1 and 2:1 and requires firms to close a position when funds fall to 50% of the margin needed. Under these UK rules, a retail client cannot lose more than the funds in their CFD account. That protection is specific to UK retail CFDs. These rules have applied since 1 August 2019. The US regulator FINRA advises you to only use money that you can afford to lose.

The main styles of trading

• Day trading closes every position on the same day. See our day trading guide for beginners.
• Swing trading holds positions for days to weeks.
• Position trading holds positions for weeks to months.

Some traders use automation. Trading bots follow programmed rules to place orders, and we explain what AI trading bots really do. A promise of guaranteed returns from a bot is a scam sign. Copy trading, where you mirror another person's trades, and paper trading, where you practice with virtual money, are two other options.

What the evidence says about trading results

One large study of day traders used Taiwan stock market data from 1992 to 2006. Researchers Barber, Lee, Liu and Odean, publishing in the Journal of Financial Markets in 2014, found that fewer than 1% of day traders predictably and reliably earned positive returns after fees. The worst-performing group lost money every day after fees, at about 28.9 basis points a day. This is Taiwan stock market data, so it shows a pattern, not an exact rate for crypto or for US and UK traders today.

European regulators reached a similar conclusion about CFDs. In March 2018, the European Securities and Markets Authority (ESMA) reported that national analyses showed 74 to 89% of retail CFD accounts typically lose money. That is an EU finding about CFDs.

Since August 2019, UK CFD firms must tell clients the percentage of their retail accounts that lose money. Look for that warning on any CFD provider's page. Across these sources the message is the same: most retail traders lose money.

Trading rules in the US and the UK

United States

Until June 2026, the pattern day trader rule required $25,000 in minimum equity. FINRA's Regulatory Notice 26-10 says intraday margin standards replace that minimum from 4 June 2026. Brokers that need more time may phase in the changes until 20 October 2027, so some may still apply the old limits.

A margin account still needs a minimum of $2,000 in equity, and brokers may ask for more. These rules cover margin accounts at FINRA member brokers, so do not assume they apply to a crypto exchange.

On tax, the Internal Revenue Service treats digital assets as property. Every sale is a taxable event, and an asset held for one year or less produces a short-term gain or loss.

United Kingdom

The FCA made its CFD restrictions for retail clients permanent, with the loss disclosure and leverage limits described above. Since 6 January 2021, firms cannot sell, market or distribute derivatives that reference certain unregulated cryptoassets to UK retail consumers. In June 2025 the FCA said that ban "will remain in place".

The FCA's guidance, Crypto: the basics, says crypto is largely unregulated in the UK, that it is highly unlikely you will be covered by the Financial Services Compensation Scheme, and that you should be prepared to lose all your money.

That is set to change. The FCA says its new cryptoasset regime is expected to come into force on 25 October 2027. For tax, read how crypto is taxed in the UK.

What is different about trading crypto

Crypto markets run 24 hours a day, every day, with no closing bell, so prices can gap overnight and at weekends.

Prices can also fall a long way. In a blog post of 30 November 2022, the European Central Bank economists Bindseil and Schaaf noted that bitcoin peaked at $69,000 in November 2021 and fell to well below $16,000 after the FTX collapse in November 2022. That is a fall of more than three quarters in about a year.

Scams target new traders. Fake trading robots and signal groups promise daily profits. This domain was once one of them: an archived snapshot from 6 August 2020 promised "Earn $6,325 daily with Bitcoin Billionaire" and asked for a minimum deposit of $250. Our guide to how fake trading robots work shows the pattern.

Custody matters too. When you trade on an exchange, your coins usually stay with the exchange. Read how crypto wallets keep your coins to see the alternative.

Where to start if you want to learn trading

If you are new to trading, work through these steps in order.

1. Learn the terms on this page: spot, derivative, long, short, spread, leverage and margin.
2. Practice with virtual money first, using paper trading.
3. Decide on a loss limit you can afford before you start, and keep to it.
4. Avoid leverage while you learn.
5. Check that any provider is authorized. In the US, use FINRA BrokerCheck or the SEC for brokers. In the UK, use the FCA register.
6. Keep records of every trade for tax.

If you only want to buy and hold crypto, start with buying and selling crypto safely instead.

Frequently asked questions