Financial markets are actually platforms where individuals are able to institutions are able to trade financial securities, commodities and other assets at prices determined by the forces of demand and supply.
Welcome to Hushfinancer's Forex academy where you will learn a lot as you get with your endless journey as a Forex trader. In this article, you will get to find out what financial markets are, and a few key concepts you need to know as far the financial market is concerned.
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What Are Financial Markets?
Financial markets in simple terms can be defined as how individuals and companies buy and sell assets (Currencies, commodities, stocks, indices, cryptos and many more.)
Individuals have been trading financial markets for more than a century now since they grew out of a practical need to help people buy and sell things more efficiently, and to help companies that need money to raise it quickly.
As time went by, markets have grown bigger and faster, and more people than ever are now able to get access to them. At first, they were the preserve of big banks, finance houses and very wealthy individuals, but not anymore.
Since there exist a lot of financial markets, they are classified into asset classes. Below is a rundown of some you might encounter.
Forex
Forex, also known as FX, This markets sees the buying and selling of the world's currencies - from the USD to the Euro, to the British pound and several other currencies, 24 hours a day from Monday to Friday.
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Commodities
Commodities are physical assets that are consumed or used by individuals, animals, or industry. Well known examples include gold, silver and oil.
Indices
An index is a parameter that tracks the price of a group of stocks, like for example, the S&P 500 (US 500) - currently one of the most widely traded indices worldwide and is a measurement of the largest listed companies in the US.
Stocks
Another popular name for stocks is equities or shares. When you trade stocks, you are simply investing in an individual company that is listed on a stock exchange. Popular examples include Apple, Netflix or Microsoft.
Cryptocurrencies
Cryptocurrencies are the newest asset class and these are currencies underpinned by Cryptography instead of a central bank. The most well known and first ever crypto currency is Bitcoin.
Fixed Income
This refers to any asset that pays the owner a set regular interest payment. The most common example here is bond but that does not cancel the fact that there are numerous types of fixed income assets available.
What Affects The Markets
It is of no doubt that each asset will have its own unique factors that affect its price, but every market's price is first of all driven by the basic principle or Demand and Supply.
Supply
Supply simply refers to hw much of a financial market is available for purchase. If there are several individuals that want to buy something but its supply is actually limited, its price will rise. However, when supply rises (but demand does not) its prices will often fall.
Demand
Demand on the other hand refers to the number of people trying to buy a financial market. If demand for a market is low but supply is high, its price will drop.
If demand then rises while supply does not follow, its price will often rise.
There are several factors that can cause supply to fluctuate for a financial asset. Like for example, a central bank might decide to increase money supply, by making lots more currency available and causing its price to fall. Gold's supply is dependent instead on a wide range of companies, institutions and countries around the globe.
As far as Demand is concerned, here are a few key factors you need to watch out for:
- News: Numerous market partakers keep tabs on the news in real-time; positive or negative headlines affecting a market can quickly drive supply or demand down.
- Central Bank Policy: Central banks are makers of decisions like interest rates and this can have a deep effect on the flow of money around the world, and will have a heavy impact on demand for a currency.
- Government Data: Government releases such as unemployment status information or inflation data can greatly affect demand.
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Who Trades Financial Markets?
Since the financial market is open to everybody, there is a wide range of people and companies that buy and sell financial markets.
Institutional Investors
Asset managers, and pension fund providers take part in financial markets to make profits for themselves and their customers. These are actually one of the big boys of all financial market.
Banks
Banks here most often acts like brokers for other companies, such as funds. Nevertheless, some banks also take part in the markets on their own behalf so as to make their own profits too.
Brokers
Brokers place trades here on behalf of their clients - usually retail investors and traders.
Retail Investors
Everyday traders and investors are able to participate in financial markets by buying and selling currencies, investing in commodities and many more.
What is Volatility?
Volatility is a popularly used word when it comes to financial markets and this refers to how much an asset's price will swing up and down over a period. Buyers and Sellers rarely have total control over a market. Instead what happens is that price oscillates as one group then another takes over and so on and so forth.
If you have been looking at any price chart, then you have probably already seen volatility in action. Highly volatile market see reasonable moves which create lots of profit or losses depending on how you entered the market.
What is Liquidity?
Liquidity refers to how easily a financial market can be bought or sold. If an asset has lots of potential buyers and sellers at any given time, then it is highly liquid and you need to be able to trade it easily without affecting its price that much.
You might struggle to fine a fitting trade if buyers and sellers are scarce.
Let us all keep in mind that liquidity is an important factor in financial markets and it lets traders to move quicker and keeps prices competitive.
Closing Remark On Introduction to Financial Markets
Financial markets play a vital role in the economy by enabling capital flow, investment, and risk management. Whether investing in stocks, bonds, or commodities, understanding how these markets function is essential for making informed financial decisions.
As financial markets continue to evolve with technological advancements, their impact on global economic development remains significant.