What is a financial market? A financial market is defined as a marketplace where buyers and sellers participate in the trading of so-called “assets”, i.e. stocks, bonds, currencies, commodities and anything else that can be listed and sold. In turn, the financial markets are divided into primary markets and secondary markets: the first are those in which newly issued financial instruments are dealt with, that is, where companies sell their shares for the first time, the secondary ones are those in which investors operate, so so are we when trading. It is good to remember what this distinction implies: when we trade we buy/sell broker assets, companies are never involved in the process. What is traded in the financial markets is called a financial instrument.
This name includes all assets that can be “translated”, i.e. that can be bought and/or sold on the market, real or virtual documents representing an agreement involving two parties. The main types of market in which traders trade are mainly three: Forex, Equities and derivatives market. Forex, short for FOReign EXchange Market, is the market involving foreign currency exchanges, in which different currency pairs are bought/sold through an exchange rate system. It is perhaps the most well-known and appreciated market among online traders, because it is open 24 hours a day for 5 days a week, and we will see in the next paragraphs how this can allow us to avoid dangerous gaps for our investments, involves many traders who guarantee high liquidity and therefore the possibility of always putting their business on the market, and the fact of being able to trade with micro lots allows investors a better management of their assets, as well as the possibility of operating even with reduced portfolios. The stock market is the one that treats the securities of publicly traded companies, and has a close correlation with stock indices.
This market is very varied and allows a multiplicity of strategies. Portfolio management depends on the cost of the shares themselves: at the time of writing, an Amazon stock costs $2,500, so it’s inaccessible to reduced wallets, but staying in the industry, a Facebook stock costs 180 and a Yahoo stock about 35, so much more accessible to anyone. It is a market that closes overnight so keeping its trade open at the turn of the day you can stumble upon the “overnight fees” applied by your broker, but also in downside openings of your share, which can in fact limit the gain or even make us end up at a loss. Finally, the derivatives market is the market in which contracts are purchased or sold, the value of which is determined by the asset from which they derive, defined as underlying. There are different types of derivatives, but the most important are certainly the options, the underlying of which is the action of a company, and futures, the underlying of which is a raw material.
We will see how the options have a much lower cost than that of actual actions. This allows the speculator to enter the market even with less capital than the stock market needs. In the derivatives market, you invest, then you buy or sell contracts, thinking about the expectation of the price that the asset can reach in the future. Forex and the derivatives market are called OTC markets, i.e. Over The Counter. This acronym refers to unregulated markets, i.e. where trading takes place outside the official stock market circuits.
The regulation is entrusted to the brokers who operate there, hence the importance of the choice regarding who to rely on in the introduction. However, you should not worry because not only individual investors but also banks, institutions and legal entities operate in this type of market. The only risk is the high volatility of the instruments treated, which is why it is important to rely on sound investment strategies. A final note: the three types of market that we have listed do not represent environments in which to trade exclusively, on the contrary, the most successful traders are those who use strategies of “diversification” of their investments, a fundamental word in online trading, which allow to balance any transactions that have gone wrong, thus going to trade on all the markets at their disposal.