What Does Trading Dollars Mean?
The term trading dollars colloquially refers to the breakeven point (BEP) for an investment or in a financial or business transaction. This is the point at which an investor or company gets back the same amount of money that was initially invested. Put simply, it involves moving an amount of money from the credit column to the debit side, which results in a net return of zero.
The concept of trading dollars is commonly found in personal and corporate investments and different markets, such as the foreign exchange (forex) market.
- Trading dollars is slang for the breakeven point on an investment or transaction.
- This is the point at which an investor ends up at the same point as when they made their initial investment.
- Trading dollars is a neutral point, resulting in neither a profit nor a loss but a net return of zero.
- It can apply to any trading position, including stocks, options, and futures.
Understanding Trading Dollars
The goal of any type of investment is to generate a return. In some cases, an investor makes a profit, meaning they earn more money than they initially invested while some investors may end up with a loss. In other cases, there is neither a profit nor a loss resulting in a net-zero return. This is often called the breakeven point or trading dollars.
Since trading dollars doesn't return a profit or a loss to the trader, one side zeroes out the other, the same way debits and credits cancel each other out. For instance, trading dollars in a forex transaction is the point where the gains on a trade equal the losses. In business development, the point where the company spends as much money on a product or service as it hopes to earn on that product or service.
This breakeven point may be utilized to protect capital during a flat market. Because of the volatility investors experience in certain markets, some transactions may seem profitable until a sudden market movement occurs.
Trading dollars can happen in any trading position, including stocks, options, and futures. The terms may also expand to other fields such as accounting and economics. As the words imply, an individual or business merely exchanges money in the credit column for money in the debit column at par.
Trading dollars also occurs when a company's revenues equal its costs.
The idea of sinking money into projects with a flat return on investment (ROI) is an unappealing one for most businesses. But another take on the concept of trading dollars was explored in a 2016 Wall Street Journal feature. In Zimbabwe, "a U.S. dollar is no longer worth a U.S. dollar. Money changers charge $102 in small notes for a $100 bill."
The odd scenario of trading dollars for other dollars at a premium was caused by the devaluation and concurrent appreciation of the U.S. currency against itself, which was a consequence of the economic crisis in Zimbabwe.
After years of hyperinflation, the country began using the U.S. dollar (USD) in 2009 in order to bring stability to the economy. But a collapsing export market and expatriated dollars caused a USD currency shortage in the country. With the expectation that then-President Robert Mugabe would revive the Zimbabwe dollar currency, American dollars in the bank were suddenly worth less than they were in cash. As people began hoarding dollars or sending them abroad, the value of the remaining U.S. cash currency only grew.
Types of Trading Dollars
As mentioned above, trading dollars is a concept that applies to many different areas of the financial industry, including financial and business development, and various types of markets.
Trading Dollars in Foreign Exchange
As noted earlier, gains and losses that cancel each other out on a forex trade are known as trading dollars. Traders often use trading dollars or a breakeven trading strategy in a volatile currency pair through the use of stops. They may place these stops around a trade if the market swings in the opposite direction.
Here's how it works. The trader may place an original stop which would result in a loss. If the market moves in the trader's favor, they may reset the stop where trade expenses equal the profit possibility. This protects their capital to use in another trade. This shift may trigger the stop closing the position at the zero-gain point.
The same strategy can help a trader who realizes a profit on a currency pair and closes only a portion of the trade. They may then move the stop to the trading dollars point, preserving capital but still keeping the trade alive for future profit.
Trading Dollars in Business Development
In business development, trading dollars is a situation that typically describes a waste of effort and resources. Allocating capital may be intended for a profitable venture, which may end up breaking even. This means the venture doesn't actually lose any money at all but doesn't make any either. These business ventures end up being zero-sum games, where gains are precisely balanced by a company's losses or expenses in product development or a particular business investment.
Examples of Trading Dollars
Here's a hypothetical example to show how trading dollars work in business development. Let's say a gold exploration company decides to explore a new gold mine. The company executes a number of initial studies, including a feasibility study, and invests a total of $10 million in the project. Just like other companies, this gold miner hopes to make more money than it invests in the project. But once the mining activities are complete, the company discovers only $10 million worth of gold in the project. This is the company's trading dollars.