An Introductory Guide to Financial Markets

An Introductory Guide to Financial Markets

 

Those looking to begin investing usually fall within two very distinct categories. The first group of people know where they want to invest based on recommendations from someone they know or they read something interesting and would like to get their feet wet in the financial markets. A second group of people have no clue where they would like to invest as they aren’t acquainted with financial markets. The only thing they know is that they have a sum of money they would like to grow, so they are seeking an investment that could make that happen.

This introductory guide to financial markets is only a brief overview of the types of financial markets out there so that you have a starting point. If something strikes your fancy, simply do some in-depth research before placing your money anywhere. Remember, it is possible to really make it big, but it is also possible to sustain a loss. Here are the main financial markets which may interest you.

Bonds

In laymen’s terms, the bond market is simply a way in which a private or government entity can raise money by ‘selling’ the underlying debt, called ‘bonds’ and an investor can make money from accrued interest when the bond matures. Actually, in simpler terms a bond can be thought of as a loan. One entity needs money to accomplish something so they sell a security to be paid back on or before a pre-stated time. The amount of money paid back to the investor also includes interest at a rate that can either be fixed or variable.

Money Markets

The best way to think of money markets would be to view them as savings accounts with one big difference. The interest rate is higher so you would potentially earn more than from a bank savings account. Money placed in these accounts are invested for very short terms and the investors each get a share of the earnings. These are generally held to be save but as was seen in the financial crisis of 2007 and 2008, they are not totally immune from losses.

Foreign Exchange (Forex)

The foreign exchange market is actually akin to betting one country’s currency against another. For example, you buy in pairs such as the USD and the GBP (United States Dollar and Great British Pound). It’s all about forecasting which currency is going to gain value against the other that would proportionately lose value. It’s vital to know when to buy, when to sell and when to hedge.

Equities

Everyone knows about equities but most people call it the stock market. This is where you can buy an actual piece of the proverbial pie. Unlike securities, derivatives, commodities and futures, for example, you actually own a portion of the underlying equity. If you enter the equities market and buy stocks in a publically traded company, you own a portion, however small, of that company.

Securities

Securities actually is a broad market that encompasses other more focused trading instruments such as bonds, derivatives and options. To learn more about securities, it would be advisable to read more about those financial instruments. It is often listed as a separate financial product, so it is wise to understand the concept before delving into those other vehicles of investment.

Options

Options are really pretty interesting. These also are almost like a loan in that you pay money for an option to buy the underlying commodity at some predefined future time. If that ‘equity’ gains in value you win because you have fixed a buying price which may be much lower than it would have been had the equity not gained in value.

Derivatives

Similar to options, a derivatives is also a contract that will get its value based on the performance of the underlying product, or entity. In the UK, spreadbetting is a form of derivative because you are forecasting the performance of one entity against another. For example, you can spread bet on a football game. The amount of winnings you receive is based on the spread between the winning and losing scores. Of course it’s more complicated than that but this is a quick way to understand the underlying principle.

Futures/Commodities

Futures and commodities are also based on market forecasts. Just as the name implies, you project how you feel a specific entity will be performing at a given time. If you project accurately you win, if not, you lose.

As you can see by now, most of these forms of investment don’t entail actually ‘owning’ anything. Most are just paper transactions that earn you money if you are correct in your future projections. It can be fun if you understand the underlying market but it can be risky if you don’t. Before investing in anything, it is important to have a solid understanding of that particular market. The market isn’t forgiving so if you project incorrectly, you could lose your investment. It’s not always easy but it is always exciting – and with the potential to grow your money, it’s something to think about.