TRADE 101: An Introduction To Financial Markets
Welcome to the high-rolling world of finance, where fortunes are made and lost, lives are changed, and the future venture capitalists are born (or extinguished, depending on which side of the market you’re on).
If you’re interested in investing your money into Financials, or want to know why your companion is staring at charts all day, this article is for you. We’ve put together a summary of the markets, so you can understand the basics of each and how they can make money for you.
We’ll broadly classify financial markets into six different types, each serving its distinct purpose:
Stock Markets
The stock market launched the highly specialized and technical trading of financial instruments and securities. It involves the buying and selling tiny pieces of a company, called ‘shares’. This ownership stock in public companies can then be traded for profit. The stock market operates through exchanges such as the New York Stock Exchange (NYSE) and the Nigerian Exchange Group (NGX), facilitating the flow of capital between businesses and investors.
Share prices rise and fall based on demand and supply, company performance, and other economic factors, such as a country’s fiscal policy. Investors can buy stocks to own and earn returns through dividends or capital appreciation.
Foreign Exchange (Forex) Markets
You’ve probably heard much about this from those trading ‘academies’. However, the foreign exchange market, like any other on this list, is a highly technical field of business. The Forex market is where the currency of a particular country can be traded against others. It leads as the largest and most liquid financial market, allowing individuals and businesses to exchange currencies for international transactions or speculation.
The market is influenced by factors such as a region’s economic data, interest rates determined by federal or reserve banks, and geopolitical events. Traders can profit by analyzing and forecasting exchange rate movements between pairs of currencies.
Bond Markets
Also known as debt or fixed-income markets, these deal with issuing and trading debt securities like treasury or corporate bonds. Governments, companies, and other entities issue these securities to raise capital to finance operations. Investors buy these bonds, effectively lending money to the issuer in exchange for periodic interest payments (coupons) and the repayment of the principal at the bond’s maturity. Guarantees from a secure establishment, such as a powerful state or a creditworthy corporation, make these bonds one of the lowest-risk financial instruments.
Commodity Markets
These markets trade raw materials like oil, gold, agricultural products, and metals. It is divided into two main categories;
- Hard Commodities, which refer to natural resources that must be mined or extracted, such as oil, gold, or industrial metals, and,
- Soft Commodities include agricultural products like coffee, sugar, wheat, and livestock produce.
Trading in these markets occurs through spot markets (where you buy and sell goods for immediate delivery) and futures markets (where contracts are made to purchase, buy, or sell commodities at a predetermined price in the future). Major exchanges for commodities include the Chicago Mercantile Exchange (CME) and London Metal Exchange (LME).
Weather conditions, supply and demand, and economic trends influence commodity prices.
Money Markets
The money market is a segment or part of the financial market where you trade short-term debt instruments with high liquidity and short maturities (typically less than one year). It makes a platform for governments, corporations, and other financial institutions to satisfy urgent financial obligations or discharge funds in the short term.
Key instruments in the money market include:
- Treasury bills (T-bills) – Short-term government securities.
- Commercial paper – Unsecured, short-term corporate debt.
- Certificates of deposit (CDs) – Fixed-term deposits issued by banks.
- Repurchase agreements (Repos) – Short-term borrowing agreements.
Money markets are necessary to maintain liquidity in the financial system and serve as a safe place for investors to store funds momentarily. Economic conditions, fiscal policies, and interest rates influence them.
Cryptocurrency Markets
These markets involve trading digital currencies like Bitcoin, Ethereum, and other altcoins. Unlike traditional financial instruments, cryptocurrencies are decentralized, operate 24/7, and are powered by blockchain technology to eliminate intermediaries and validate and secure transactions. Exchange platforms like Binance and Coinbase facilitate coin trading.
However, crypto prices are highly volatile and influenced by supply and demand, regulatory developments, and technological advancements. We can segregate Cryptos into different types, namely:
- Payment-focused coins (e.g., Bitcoin)
- Smart contract platforms (e.g., Ethereum), and,
- Stablecoins (e.g., USDT).
The evolution of crypto coins has proved to be one of the most important developments of the 21st century. It has disrupted traditional and established financial institutions and markets and changed how we see money and the inherent value of payment/barter systems. These markets typically attract investors seeking speculative gains and those seeking alternatives to conventional currencies.
Final Thoughts on the Financial Markets
Overall, these markets we’ve discussed are vital to the movement of money in the globalized financial ecosystem, and their operations are felt all over the world by market stakeholders, investors, and ordinary individuals.
Some facilitate our day-to-day activities, from simple business dealings to seismic international transactions. In contrast, others disrupt the status quo and create new systems for making and managing money. However, each plays a significant role in the universal economy, creating opportunities for investment, hedging, and capital raising.
Let us know what financial markets interest you the most, and if you have any tips or insights into trading, leave us a note in the comments below. We’d love to hear from you.
Till next time, ciao.
