# Exchange, broker, instruments: a map > A plain map of where trades happen and what you can trade: shares, funds, currencies, futures and coins, plus what going short and leverage mean, with the warnings. - Course: [Trading Basics: How It Works, How Not to Lose Everything](https://productovi.com/courses/trading.md) - Module: How does a market work under the hood? - Lesson 5/32, ~24 min - Source: https://productovi.com/courses/trading/exchange-broker-instruments ## Who is between you and the price **Alex Tutor:** Back on your Pebble practice account, today we draw a map. When you tap "Buy", who actually gets your order, and what are you buying? **Nora:** Pebble sells me the share, right? It's their app. **Alex Tutor:** Usually not. Pebble is a **broker**: the firm that opens your account, holds your money and passes your orders on. The order goes to an **exchange**, a marketplace where buy orders and sell orders from many people meet. ![Alex holds a phone at the start of a stone path that runs through a small booth, past Marc checking a safe, to a square where pebbles from many paths meet.](https://productovi.com/courses/trading/diagrams/m2-l1-scene.png) **Alex Tutor:** On many markets there is also a **market maker**: a firm that always shows both a price to buy and a price to sell. It earns the gap between them, the spread, in return for always being there. ![Your tap goes to the broker, which holds your money and passes the order on to the exchange, where it meets other people's orders and a market maker's prices.](https://productovi.com/courses/trading/diagrams/m2-l1-order-route.png) **Sofia:** So the other side of my trade is a stranger or a market maker, not the app. **Alex Tutor:** For shares and funds on an exchange, yes. Some products, like many currency and coin trades, happen directly with the broker or a dealer. Then the firm itself can be your other side, so ask how it earns from you. **Marc:** Before I put real money anywhere, I check two things: is the broker licensed where I live, and where is my money held. > **Exercise:** Match each player with its job. **Alex Tutor:** Marc mentioned two checks before real money goes anywhere. Let's make sure they stick. > **Exercise:** Before moving real money to a broker, which two checks come first? ## What you can trade **Alex Tutor:** Now the menu. Each thing you can trade is an **instrument**. Pebble's practice market has one of each main kind, all made up. **Alex Tutor:** A **share** is a small piece of one company, like Northwind Foods. An **index fund** holds many companies at once: Harbor 20 holds 20. One firm's bad news moves a fund far less than one share. **Alex Tutor:** A **currency pair**, like Lumen/Crown, is the price of one currency in another. Daily moves are tiny, so brokers often offer leverage on it. Hold that thought. **Alex Tutor:** **Futures** are contracts to buy or sell something later at a price fixed today. A small deposit controls a large amount, so leverage is built in. **Alex Tutor:** And a **coin**, like Spark Coin, is a digital token. No company or profits stand behind it, it trades around the clock and its price can halve in a day. It also attracts fake price pumps. > **Exercise:** Match each Pebble instrument with what it is. **Alex Tutor:** One item on the menu hides leverage inside it. Can you spot which? > **Exercise:** Which instrument has leverage built in, because a small deposit controls a large amount? ## Up, down and borrowed **Alex Tutor:** Two more words. Buying first and hoping to sell higher is a **long position**. Selling first, with a borrowed instrument, and buying it back later is a **short position**: it earns if the price falls. **Nora:** So shorting is just buying, backwards? **Alex Tutor:** With one nasty difference. A long can lose at most what you paid: a price stops at zero. A short loses as the price rises, and a price has no ceiling. > **Exercise:** On a short position, the most you can lose is the amount you received when you sold. ![Entered at 40, a long loses at most 40 a unit, because a price stops at zero; a short loses 80 a unit at 120 and keeps losing as the price rises.](https://productovi.com/courses/trading/diagrams/m2-l1-long-short.png) **Alex Tutor:** Last word: **leverage**, trading with money borrowed from the broker. Say you have 1,000 dollars and use 5x leverage: you now control a 5,000-dollar position. **Nora:** Five times the profit, then! **Alex Tutor:** And five times the loss, counted against your own 1,000. Work it out. > **Exercise:** You put in 1,000 dollars of your own money with 5x leverage, so the position is worth 5,000. The price falls 10%. What share of your own 1,000 is lost, in percent? **Alex Tutor:** That's why leverage, coins and shorting each get a warning label in this course. They are not "advanced tricks". They are ways to lose faster. ![1,000 of your own at 5x makes a 5,000 position; a 10% fall costs 500, half of your own money.](https://productovi.com/courses/trading/diagrams/m2-l1-leverage.png) **Nora:** But on Pebble it's practice money anyway. **Alex Tutor:** Practice money is for building habits. If 5x feels fine with pretend dollars, it will feel fine with real ones, and that's the problem. > **Exercise:** Which of these can lose more than you put in, or very fast? Pick all that apply. **Alex Tutor:** Marc's rule boils down to one question. Which one? > **Exercise:** Which question, asked before any trade, tells you whether the trade is ready? **Marc:** My rule on the practice account: no leverage and no shorting until I can say exactly how much I'd lose if I'm wrong. **Sofia:** And that question works for any instrument. **Alex Tutor:** Yes. Before any trade: if I'm wrong, how many dollars do I lose? If you can't answer in dollars, the trade isn't ready. > **Exercise:** Nora says: "With 10x leverage on Lumen/Crown, a 1% move makes me 10%. That's just smart." In 2–3 sentences, explain what she leaves out, with a number. > **Key ideas** > > - The **broker** holds your account and passes orders on; the **exchange** is where orders meet; a **market maker** quotes both prices and earns the spread. > - Instruments: a **share** (one company), an **index fund** (many companies), a **currency pair** (one currency in another), **futures** (a contract for later, leverage built in), a **coin** (a token with nothing behind it). > - **Long** gains if the price rises; **short** gains if it falls, and its loss has no ceiling. > - **Leverage** multiplies the loss on your own money: 1,000 at 5x loses 500 on a 10% fall. > **Educational, not advice** > > This course explains how trading works; it never tells you what to buy or sell. Most people who trade lose money, and you can lose all of it, faster with leverage, shorting or coins. For taxes and rules, ask a licensed professional where you live. - Previous lesson: [Case: three promises that sound too good](https://productovi.com/courses/trading/too-good-to-be-true.md) - Next lesson: [Order types: market, limit, stop](https://productovi.com/courses/trading/order-types.md) --- Productovi Learning. Free, no sign-up needed to read.