Introduction

Well, traditionally, a market is a place where people go to buy or sell things to meet their needs. Financial markets are very similar. They allow people to buy and sell various financial products, such as stocks, bonds, and currencies. Many organisations rely on financial trading to meet their business needs. While there are others and individual people, who trade the markets to profit from price fluctuations. This is, either in the short term or long term.

Take Mrs Miggins, for instance, who thinks the price of gold might go up in the future. She decides to buy some, and sells it a month later when the price goes up, making a profit. Of course, the price could have gone down, and that was the risk she was willing to take. Market prices go up and down on a daily basis according to supply and demand and they are affected by a number of factors which we will look at later.

First, let’s take a look at some of the most familiar financial markets in the world – those that deal in stocks, currencies, commodities and bonds.

Stock Markets

The basic purpose of a stock market is to enable companies to raise money by selling shares in their ownership. A share, also known as stock or equity, is therefore a small piece of ownership in a company. The price of a share generally reflects what people think the prospects of a company are going to be in the future.

Let’s say the NICE clothing company wants to expand its business and open more branches, but it doesn’t have enough money to do this. The company could borrow money, or, it could choose to give away portions, or shares, of its company in return for the cash it needs by listing on a stock exchange. This means that information about its activities becomes public, and anyone can buy or sell its shares. If many people think the NICE company will do well in the future and they buy shares, this could cause the NICE share price to rise.

There are many stock markets around the world, some of the most famous ones include the New York Stock Exchange and the London Stock Exchange. The combined share prices of the largest companies listed on a certain exchange are sometimes represented by a stock index, like the Dow Jones-30 or the FTSE-100. If the share prices of the big companies in an index go up, so can the value of the index itself.

Currencies Market

Another type of financial market is the currencies market which is actually the largest in terms of volume of business. It is also known as the foreign exchange, forex or fx market and its basic function is to allow people and businesses to swap currencies. For example, someone in the USA going on holiday to Spain would need to swap some dollars for Euros. And, a UK business exporting goods to Japan would have to convert its earnings in Yen to its domestic currency of pounds. There are many who trade on the Forex market, buying and selling currencies in order to profit from the fluctuations in exchange rates. The value of a currency depends on many factors, including the country’s economic prospects and interest rates.

Commodities Markets

The commodities markets deal with the buying and selling of raw materials. Examples of commodities include diamonds, gold, silver, oil, coffee, sugar, orange juice and cattle. While many traders use the commodity markets to manage business needs, others use them to speculate and profit on price movements.

Bond Markets

The bond markets allow organisations like companies or governments to borrow money by issuing bonds. A bond is basically a loan, or an iou. Someone who buys a bond from a company, for example, is essentially lending money to the company which will eventually pay this back with interest. The prices of bonds depend on many factors like economic data, news, sentiment, and, importantly, interest rates. In fact, bond prices generally go up when interest rates go down, and visa versa. There are many people who seek to profit from changes in interest rates by trading bonds.

Conclusion

Markets can be exciting and sometimes unpredictable. A good way to learn more about how different markets work is to use systems that let you practice trading without risking your own money. These will help you build your knowledge and experience of how market prices change, and help you feel more comfortable about the risks.