Jason Hampton, one of the top financial advisors at Jones Mutual, defines financial markets as markets where individuals and institutions exchange financial commodities and securities. The value at which these financial assets (commodities and securities) are traded at is referred to as the exchange rate and it normally reflects their supply and demand across the world.Securities include currencies (both fiat and crypto), bonds and stocks. On the other hand, commodities include agricultural products and precious metals.
Below is an insight into the different financial markets that will help you in choosing the best markets for your trade and eventually become successful:
This includes the stock markets and bond markets. These markets are normally used by institutions and companies to raise funds to finance some long-term investments. The companies or institutions normally float shares in the stock markets or bonds in the bonds market for individual or other companies and institutions to buy. Once the shares or bonds are bought, the money raised goes towards funding the operations of the company or institution.
In the stock markets, investors or traders make money by receiving dividends or by selling the shares to other investors in case the value of the shares rises. On the other hand, in the bonds markets, the investor who gives the bond (loan) makes profits through the fixed borrowing rate which is attached to the bond; therefore after the specified duration of time for the bond to mature expires, then the individual, company or institution is refunded back the money plus the interest.
The capital markets require larger amounts of investments and the participants should also be ready to do long-term trading since the prices in these markets take time to change. They are best suited for institutions or individuals with large sums of money to invest.
These markets include Treasury bills, Certificates of Deposits (CDs), municipal notes, banker’s acceptances, and federal funds as well as repurchased agreements. They have quite high liquidity. Their maturity periods are also short although it can go to a year depending on the investor’s specifications.
Participants range from companies selling commercial papers to individual investors purchasing Certificates of Deposits so that they can save their money for a while. There are very high risks involved especially in relation to default securities. At times securities like commercial papers may end up defaulting. Also, despite the fact that they have a high liquidity, the returns a quite low because of the high level of conservancy involved.
This is where currencies of different economies are traded. It is one of the most popular markets globally due to its high liquidity. On average the value of trades that are made in a day is almost $2 million.
Another advantage with the forex markets is that they are decentralized and thus hard to be manipulated by a single entity/individual since they are not controlled from a single point.
Also, the forex markets are normally open 24 hours five days a week. Therefore traders can trade at any time of the day and from whichever location.
Anybody can participate in these markets irrespective the size of saving they wish to invest. Also, the maturity of trades is set by the trader; if the trader wants a long-term trade he/she just places a long-term trade and if he/she wants a short-term trade, he/he just places a short-term trade. With technology, trading the financial markets is also becoming automated by using trading robots.
A derivative is a financial contract whose price is determined by the prices of the core assets involved in the contract. Derivatives markets include futures, swaps, forwards, CFDs and also Options.
Among the most traded derivatives markets are the CFDs and options; simply because they are less complex compared to the rest of the derivatives markets. The CFDs markets are similar to the forex markets and thus even offered in conjunction with the forex markets by most financial trading brokers.
The Options markets are slightly different from the Forex markets although with a lot of similarities. The only difference is the way in which trades are executed. The futures, forwards and swaps involve quite complex trading strategies and are best suited for the experienced financial traders.