A Financial market is where financial securities are traded by institutions and individuals. The organizations, public or private will use the Financial Markets to raise capital in order to operate by selling securities in the company’s name. Then the question becomes, what are the most important products traded in a financial market? so we don’t trade oranges, we don’t trade potatoes, what do we trade then?
Equities – Stocks
The most common financial products are Stocks. Investors have the opportunity to access the stock market to buy and sell stocks of a public traded company.
The stock market represents an important part of any economy because it gives access to companies to capital for their operations and the opportunity to investors to participate in the potential gains that come from the performance of the company as they are now part owners.
We now need to differentiate between the primary and the secondary market. Companies who issue shares will have them offered in the primary market and after that, all the trading and exchanges of these shares will happen in the secondary market.
We also have products related to debt, when companies want to borrow money, they issue debt, they borrow money through some financial instrument called bonds;
Bond Market – Fixed income
The bond market also called credit or fixed-income market is where debt securities are issued and traded. Even though this market is not as popular as the stock market, it is actually much bigger and is vital in any economy to support the operation of the public and private sectors.
A bond is just a debt investment, and the dynamics are very simple as the investor loans money to a company, which borrows the funds for a defined period of time at a fixed interest rate that has to be paid to the investor. Bonds are used for the financing of a variety of projects and activities in the public and private sector and they can be bought and sold around the world on credit markets. Bonds are really attractive to conservative investors, but they also can be risky and complex investments.
Another important market, and the subject of this course, is the Derivative Market, and because options are a derivative product, it is imperative that we understand it;
We need to understand that the value of a derivative is linked to the value of an underlying asset. A derivative is a contract, but the contract price is determined by the market price of the core asset.
This is a complicated subject because the derivatives market adds yet another layer of complexity and this is the reason why most of the participants in this market are experienced traders with high-risk tolerance. Not only are these instruments complex but so too are the strategies used by this market’s participants. However, it can be really effective when is used for risk management porpuses. The most commonly used derivatives are forwards, futures, options, and swaps.
The forex market is where currencies are traded. The forex market is the largest, most liquid market in the world with an average traded value that exceeds $1.9 trillion per day and includes all of the currencies in the world. The forex is the largest market in the world in terms of the total cash value traded, and any person, firm or country may participate in this market.
There is no central marketplace for currency exchange; trade is conducted over the counter. The forex market is open 24 hours a day, five days a week and currencies are traded worldwide.
Forex trading in the currency market had largely been exclusive for large financial institutions, corporations, central banks, hedge funds, and extremely wealthy individuals but the emergence of the internet has changed all of this, and now it is possible for average investors to buy and sell currencies easily through online brokerage accounts.