The best financial markets to trade
In this article, you will learn all about the different types of financial markets that you can trade-in, how they have changed over the years, and which ones to focus on. You will also learn how to get started in the financial markets. Trade absolutely risk-free using an advanced online trading strategy!
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 profits 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. This section examines the most important financial markets and explains their global role.
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 the local or national currency, the essence of financial markets is buying, selling, and holding 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 trading CFDs (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.
Financial Markets Review – Today
Generally speaking, financial markets have helped support international trade and the global economy over the past 100 years. Especially over the past 25 years, when financial markets have become even more complex, sophisticated, and necessary.
At the beginning of the 21st century, global financial markets have become more dynamic and rapidly changing. There are now fewer foreign exchange controls, capital controls, more global financial transactions, and more payment systems in general.
There is also rapid movement due to international capital flows, the development of new financial instruments (such as cryptography), and new digital technologies. Overall, this is leading society towards more open, advanced financial markets and the methods applied in them.
While the above trends are relevant to financial markets in general, each financial market also has its own distinct trends. We will look at some of the trends in the Forex and stock markets.
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. The estimated turnover of the Forex market 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 US stock markets have arguably become much more important than 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).
Financial Market Models – Industrial Sector
From 1900 to 2017, the industrial sector changed significantly. Segments that were very strong in 1900, such as railways, lost significant market share a century later.
In the United States, railways dominated the American stock market with a total share of over 50%. In 2017, this figure dropped by several percent. However, other industries such as banking, finance, and healthcare have grown significantly, while some of the large industries that were large in 1900 did not gain market share in 2017.
The trends of the last century should not be the trends of this century. Fortunately, traders don't need to know what the future will look like 100 years from now. They can just trade with only short time frames in mind. Ultimately, it is easier to understand what financial markets might be doing in the short term rather than the long term, especially when looking at an entire century.
Different types of financial markets
This section will provide an overview of the different types of financial markets that were mentioned earlier.
Financial Markets Review – Forex Market
As mentioned earlier, the growth of the Forex market and its volume have 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 tools 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
The stock market is a market that includes stocks and bonds (both private and public sector). 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 for the purchase of 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 is focused 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.
Financial Markets – Conclusion
You now have a better understanding of the financial markets as well as the main trends to focus on!