The global financial markets
, also called capital markets, are marketplaces that provide a platform for investors to buy and sell different types of assets like derivatives, stocks, bonds, commodities and currencies. When starting out on your trading journey, it is beneficial to get to know the different types of financial markets, and the assets or securities that you can buy and sell on each market.
Types of Global Financial Markets
1.The stock markets
The stock market is where investors trade shares of ownership of different public companies.Companies offer shares for the public to buy through an initial public offering (IPO), and different investors and traders participate in the financial market through buying and selling those shares. When an investor buys a stock at a low price, and then sells it to another investor at a higher price, the selling investor makes a profit from the sale.Through the stock markets, companies raise money to grow their businesses, while investors make a profit in the form of dividends from the company earnings, or by selling the shares to other investors and traders.
2.The bond markets
When the government or an organisation needs access to large loans, they go to the bond market. Bonds such as treasury bonds, municipal bonds, and corporate bonds are issued, bought and sold to raise money to fund long-term private and public expenditures.When investors buy bonds from governments and organisations, the amount of the bond plus the interest accrued is returned after an agreed period of time.
3.The commodities market
The commodities market creates an avenue for investors and traders to buy and sell natural resources like gold, silver, oil, corn or natural gas.Due to the unpredictable nature of the price of some of these commodities, a special market called the commodities futures market is created for them. In this market, the price of commodities to be delivered at a future date is determined and sealed today.Investors can mitigate risk within their wider portfolio by investing in certain commodities. While commodities tend to experience high level of short-term volatility, because of their finite supply and generally high demand, they tend to offer good long-term price stability when compared to stocks and currencies.This can be best illustrated by an increase in the price of gold whenever there is economic uncertainty in a country; to mitigate losses, money flows from the stock and currency markets that are experiencing volatility or prices crash, into what are considered safer commodities.
Available on both an exchange, but more commonly, over the counter (OTC), derivates are connectors between two or more parties that base their value on an underlying asset. They are mostly used by investors to hedge the risk of another trade.For example, if an investor holds all their capital in GBP but then buys shares in a company in USD, the investor's profits on these shares are not vulnerable to changes in the GBP/USD exchange rate. If the value of GBP was to rise significantly in relation to USD, the investor could see the profits made on selling their shares wiped out by the exchange rate when converting the revenue from their sale of shares from USD back into GBP.In order to mitigate the risk of this happening, the investor may well choose to invest in a derivative that will appreciate if GBP increases in value against USD. The profit made from this trade would compensate the investor for the profits lost on the share trade.Derivates often include futures, options, forwards or swaps.
What Are the Functions of Global Financial Markets?
The financial markets play a crucial role in ensuring the strength and success of the global economy in the following ways:
Ensuring liquidity of financial assetsEnsuring liquidity of financial assets
Financial markets ensure the liquidity of financial assets by bringing many sellers and buyers together. This means that buyers and sellers can trade their financial securities and make investments whenever they like because there is always a market for them to buy from or sell to.
Putting savings to good use
Financial markets make sure that money does not lie idle in banks and other financial institutions. While one person wants to save, another one needs a loan. Financial markets allow banking and lending institution to allocate money to those who need it so that it is used more productively, at the same time as providing a return for investors.
Determining the price of assets
Because prices are determined by market forces such as supply and demand, and because an asset is ultimately worth what somebody is willing to pay for it, financial markets help to determine the value of assets.
Creating job opportunities
Financial markets help to lower the unemployment rate not just by creating numerous job opportunities for traders, investors, and professionals in financial institutions, but by increasing liquidity and lending within economies, facilitating business expansion and job creation throughout.
Access to capital
Governments via the bond markets and businesses, primarily via the stock markets, can raise money easily to fund their respective ventures.
Foreign exchange, or Forex, is the buying and selling of currencies from different countries. It is estimated that more than $5 trillion is traded on forex markets
every single day. A CFD (contract for difference) is a contract between a trader and a broker, in which both parties agree to exchange the difference between the entry and the exit price of an underlying asset.Such contracts are commonly used to trade assets such as oil, precious metals and indices.
Similarities between CFDs and Forex trading
No transfer of physical assets When you trade EUR/USD in the Forex market, or gold via a CFD, you do not physically own the cash or the gold; you are simply speculating on their prices based on your expectations of them rising or falling.
Over the counter (OTC) trading
Transactions are decentralised and take place electronically through a network of financial institutions, not in a physical centralised location.
Same trading platforms
CFDs and Forex are traded on the same trading platforms, such as the incredibly popular MetaTrader 5
, using the same pricing methods and similar-looking charts.
Same trading costs
Unlike other trading instruments that might charge fees and commissions, the only cost of trading forex and CFDs is the spread.
Transactions are executed the same way
Whether the market is rising or falling, traders can easily enter or exit the market in both forex and CFD trading.
Differences between CFDs and Forex trading
The types of products
Forex involves only currencies in the forex market.CFD trading involves metals, indices, and energies across a diverse range of financial markets.
Factors of influence
Forex trading is influenced by global events such as changes in international politics, levels of unemployment, and interest rates.CFD trading responds to changes in trends associated with the specific business sector or the supply and demand of that given commodity.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.The vast majority of retail client accounts lose money when trading in CFDs.You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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