What is financial trading?
Financial trading is the buying and selling of financial assets. This is done in one of two ways: through the exchange or through the cashier.
What is financial trading?
An exchange is a highly organized trading platform where you can trade a specific type of instrument.
What is traded in financial trading?
Financial instruments such as stocks, forex or bonds, or derivatives such as CFDs, futures, or options can be traded. Whatever the instrument traded, the expected result is always the same: making a profit. If you buy an instrument at a low price and sell it at a higher price, you are making a profit. If you sell an instrument for less than you bought it, you will lose.
Who is trading?
In the financial markets, millions of companies, individuals, institutions, and even governments trade simultaneously. But what is a trader? A trader is defined as a person who buys and sells financial instruments for the purpose of making a profit.
Some traders stick to a specific instrument or asset class, while others have more varied portfolios. Some do a lot of research before opening a trade, others read charts and follow trends. But all trades have one thing in common – they all carry risk. Risk is a key concept in all types of financial trading. Regardless of which instrument is being traded, who is trading it, or where the trade is taking place, balancing potential reward and risk is the key to a successful trading strategy.
What markets can you trade?
Thousands of different financial markets are traded, including stocks, indices, cryptocurrencies, and forex.
Trading versus investing: what's the difference?
The difference between trading and investing is how you make a profit and whether you own the asset. Traders try to profit from buying low and selling high (long long) or selling high and low buy (short), usually in the short to medium term. Investors will also try to profit from buying the stock at a low price and selling it high but in the longer term. They may also seek to generate income in the form of dividends.
A popular trading method involves trading CFDs, while investors can choose between trading stocks or ETFs. When you trade derivatives, you do not own a physical asset, but when you trade stocks, you own them.
What is the financial market?
The financial market is a market where financial securities are traded both nationally and globally. Traders buy and sell these securities to generate potential profit while trying to limit their risk.
Many traders tend to focus on one financial market, such as trading stocks or CFDs, but it is important to have an overview of all the financial markets available for trading because they can influence each other.
At its core, the financial market is not very different from other markets where various goods and products are bought and sold. But instead of exchanging vegetables, clothes, or computers for local or national currency the essence of financial markets is the purchase, sale, and storage of financial securities, products, and instruments. Over the past several decades, the financial market has expanded exponentially and now offers many types of financial instruments.
Different types of financial markets
- Forex- also known as the foreign exchange market or FX.
- Stock Market – for trading stocks and bonds.
- Derivative market – for tradingCFD(contracts for difference).
- Commodity market- for trading in commodities such as gold, silver, or oil.
- Money market – short-term loans.
- Cryptocurrency market – this includes bitcoin and altcoins.
- The mortgage market – which offers long-term loans.
Some of these financial markets are inherently more long-term oriented, others are short-term oriented, or a mixture of both. For example, there are many long-term loans in the mortgage market, and money markets are focused on short terms. Forex, stocks, commodities, and CFDs can be traded in both the short and long term. Professional traders can decide whether to invest or trade depending on their own approach and trading style.
Financial market functions – How the financial market works
Financial markets play an important role in the economy and perform the following main functions
- Determination of prices
- Efficiency (costs such as transaction costs)
- Traditional borrowing and lending
- Information on the movement of funds
- Sharing risk
Financial institutions help facilitate the flow of funds in global markets and in the overall financial system. These institutions include commercial banks, investment banks, central banks, insurance companies, brokers, and even non-bank financial institutions (such as credit unions).
The functions of financial markets have remained unchanged throughout history. However, with the advent of technology, international financial markets have become more closely interconnected. This helped the system of the world's financial markets to grow and expand.
Types of financial market – Forex
The Forex market has become very popular over the past few decades, and its volume has grown significantly over the past 30 years. Approximate Forex market turnover in different years:
- 1977 – $ 5 billion
- 1987 – $ 600 billion
- 1992 – $ 1 trillion
- 2001 – $ 1.5 trillion
- 2007 – $ 3 trillion
- 2010 – $ 4 trillion
- 2013 – $ 5.3 trillion
- 2017 – $ 5.5 trillion
As you can see, Forex volume has increased 1000 times in 40 years. In the period from 2001 to 2017, it increased by 267%, and in the period from 2010 to 2017 – by 40%. These impressive growth figures show how important the foreign exchange market has become.
Types of financial markets – Stock market
Another trend is also manifesting itself in the global stock markets, where the US stock markets may have become much more important than the markets in other parts of the world. The American Stock Exchange was a leader in the 20th century, according to The Triumph of the Optimists (2002) by Elroy Dimson, Paul Marsh, and Mike Stanton. Their research shows that there have been three important changes in the past 100 years:
- The US has achieved market dominance.
- The exchanges have been consolidated.
- There was a rotation of the secular sector (market activity is carried out with a long-term perspective).
Different types of financial markets
Financial Markets Review – Forex Market
As previously mentioned, the growth of the Forex market and its volume has been impressive over the past 40 years, from $ 5 billion in 1977 to over $ 5 trillion in 2017. There are several key factors contributing to this trend:
- Improvement of computer technology.
- High price volatility.
- Better access to financial markets through brokers.
- More trading instruments and access to information.
Forex is a type of market that is popular with traders looking for short and medium-term trading opportunities as it is open 24 hours a day, 5 days a week.
Financial Markets Review – Derivative Market
Derivatives are securities that are linked to an underlying asset and are sometimes used as a hedge against price changes. Options, Futures, and CFDs are examples of derivatives. Speculators can use these tools to hedge against risk or take on risk in order to potentially obtain financial gain.
Financial Markets Review – Commodity Market
The commodity market represents such goods as gold, oil, as well as agricultural and livestock products. Investors and traders can indirectly participate in the market turnover by buying stocks or options, futures, or CFDs.
Financial Markets Review – Stock Market
A stock market is a market that includes stocks and bonds (both private and public). There is a primary market in which companies and governments issue new securities and a secondary market in which previously issued shares and bonds are traded.
Financial Markets Review – Insurance and Mortgage Markets
Mortgage markets revolve around long-term loans that are provided to buy real estate. These loans can be sold in secondary mortgage markets. Insurance markets involve the insurer and the insured, where risk is transferred for a fee. Insurance companies have significant cash reserves, which they invest in the stock, bond, and derivatives markets.
Financial Markets Review – Money Market
The money market focuses on very short-term debt and includes local banks and central banks. Banks lend to each other for short-term liquidity purposes. The central bank often acts as the lender of last resort.
Financial Markets Review – Cryptocurrency Market
This is a relatively new market, Bitcoin and other altcoins hit the headlines at the end of 2017 when high volatility caused prices to spike. Blockchain technology and mining system have generated increased interest in the cryptocurrency market.
How this market will develop, how it will shape financial markets in general, and whether it can create more value for consumers and the financial system will be determined in the next few years.