The term financial market might sound confusing, but it is simply a marketplace where traders buy and sell assets. These assets include stocks, currencies, indices, commodities and cryptocurrencies, and traders buy and sell them to gain potential while trying to limit their risks.
Though many traders typically focus on one aspect of the financial market, for instance, trading currencies or stocks, it is important that you have a general overview of all aspects of the financial market as they can have an effect on each other. This article is designed to give you an insight into the most important financial markets and explain their role in the global scheme of things.
Financial Markets: All You Need to Know
At its core, the financial market is barely different from other markets where goods and products are bought and sold. But rather than exchange goods like computers, clothing or vegetable for a currency, the focus in the financial market is on buying, selling and holding of financial securities, instruments and products.
How to Trade in the Financial Market
Millions of beginners try their hand at the financial market each year, but most walk away a lot wiser but a little poorer, without actualizing their full potential. Most of those who fail share one common trait: they didn’t master the basic skills needed to navigate through the waters and tilt the odds in their favor. Good thing is, you do not need to be a seasoned economist or have a professional financial background to achieve success in the financial market.
There are different ways to trade in the financial market. Your trade can be direct, which involves buying an asset or investment, or indirect, which involves paying into a fund where your choices are managed. With the continued evolution of digital technology, you can now trade online, using your market software to make trades. But how do you decide a way to trade?
Your trading decision comes down to your needs. If you are looking to trade actively in the market, you may want to consider investing on a day trading platform. On the other hand, if you are a long-term investor looking to buy shares, it might make more sense for you to work with a low investment account or an online trading platform.
Characteristics of the Financial Markets
A good security financial market will possess the following characteristics:
- Buyers and sellers in the market trade at prices that are above and below the current pricing in the market.
- The market reflects all the available information regarding demand and supply factors. This condition is known as informational or external efficiency.
- Investors will easily access relevant information for the security transactions.
- Transaction cost is minimum.
Types of Financial Markets
There are different types of financial markets, but they vary in size. While some are small, others are well known in the international scene. They include:
The capital market is made up of a primary and secondary market, and aids traders raise capital on a long-term basis, typically over a year.
The stock market is also known as equity market or share market, and it refers to public markets designed for the issuance, buying and selling of shares and other financial securities over-the-counter or on a stock exchange.
The foreign exchange (FX) market is the largest and most liquid market in the world with an average traded value worth over $5 trillion daily. This market includes all of the world’s currencies, and any individual, company or country can trade in it.
Over-the-Counter (OTC) Trading
Also known as off-exchange trading, OTC refers to the trading of securities between two parties outside of formal exchanges and without the management or supervision of an exchange regulator.