Financial Markets Explained

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Financial Markets Explained

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Financial markets is an umbrella term that refers to any marketplace where you can buy, sell, or trade any financial instrument like stocks, commodities, currencies, and crypto assets among other thins. Financial markets are an essential part of the economy and any disruption within them can lead to various problems like unemployment and recession.

In this article, we will learn about some of the most well-known financial markets and some of their features:

Stocks Market

“Stock” is a financial term used to describe the equity of a given company. Each unit of stock is called a share and the shares give you the ownership of a fraction of a particular company. 

There are different types of stocks: large-cap, mid-cap, and small-cap. Each type is dependent on the market value of the company which the stock represents.

Large-cap stocks are shares of the largest US companies or have a market cap of $10 billion or more, such as Tesla, Microsoft, and Coca-Cola. Mid-cap companies are valued between $2 billion and $10 billion while small-cap companies usually have a market capitalization between $300 million and $2 billion.

Where are stocks traded?

Stocks are traded on major exchanges around the world. NYSE, the New York Stock Exchange is the world’s largest stock exchange. Nasdaq is the second largest stock exchange which is also located in New York.

What are indices?

Indices track the performance of a group of assets on the stock market. The most prominent Indice is the S&P 500 which tracks the 500 leading publicly traded companies in the US. It’s interesting to know that S&P 500 is used to gauge the overall health of the US stock market.

Forex Market

The foreign exchange market or Forex is a global marketplace to trade currencies like the US Dollar or British Pound. It is the largest market in the world by trading volume. Volume refers to the amount of money traded on the market by investors and traders. In other words, the Forex market is the most liquid market in the world and sees trillions of dollars of volume exchanged on a daily basis.

Where is FX traded?

There is no central location as it is a distributed electronic marketplace. Forex market is open 24 hours a day, except for weekends.

The most traded Forex pairs include Euro and US Dollar (EUR/USD), The Dollar and Japanese Yen (USD/JPY), British Pound Sterling and the US Dollar (GBP/USD), and The US Dollar and Swiss Franc (USD/CHF).

The Forex market is quite important for countries as central banks use the market to control the money supply and inflation by utilizing their large currency reserves in order to stabilize their economy when they feel it’s necessary.

Commodity Market

The commodity market is where you buy and sell raw materials.

What is a Commodity?

In economics, a commodity is a good, like gold or oil, which is usually a resource with some fungibility. Fungibility simply means that you can exchange one unit of the asset with another one because they have the same features and value.

Commodities are split into 2 categories:

  1. Hard Commodities: this type can be mined or extracted which includes gold and oil.
  2. Soft Commodities: this type of commodity is usually agricultural products such as wheat and corn.

The price of the good or commodity is determined by the demand in the market.

Where are Commodities Traded?

Commodities are usually traded on the futures market. With the futures market, you trade a contract with predefined time and price. We will explain more about futures market in the next section.

Gold is one of the oldest commodities that has been traded for years and was accepted as a means of exchange for years. Governments make use of commodities in the agricultural and energy sector to negotiate with other countries while central banks hold large reserves of Gold on their balance sheet as it acts as a store of value.

Spot vs. Futures Market: what’s the difference

The spot market is a marketplace where you trade assets at their current price, called the spot price. DIFX Spot Exchange, for instance, allows you to buy, sell, or trade different crypto assets by placing orders on the exchange.

As we mentioned before, the futures market is where futures contracts are exchanged between buyers and sellers. A futures contract is a legal obligation for a buyer to purchase an asset from a seller at a future date with a predetermined price.

The futures contract requires the buyer to take ownership of the underlying asset once the expiration date is reached. However, the buyer can sell their contract at any given time before the expiration date.

How is a spot and futures price determined?

The spot price is the current price of an asset with payment being made immediately. This price is determined based on supply and demand.

A futures price, on the other hand, is usually the spot price plus any additional costs that will arise between the sale and expiration, e.g. storage and transportation of a commodity.

Cryptocurrency Market

Like other conventional financial markets, the crypto market is where you can trade different cryptocurrencies. Crypto currencies also can be traded on the spot market or the futures market.

When trading on the spot market, investors can simply swap fiat or traditional currency for cryptocurrencies while on the futures market, investors can make use of leverage in order to buy and sell in larger quantities. Leverage allows traders to open a position in the futures market by just having a portion of the required amount.

Where to trade Crypto?

You can sign up on various Centralized Exchanges (CEXs), like DIFX, where they can trade cryptocurrencies on spot or through futures contracts. Decentralized Exchanges (DEXs) are another option where you can trade cryptocurrencies directly with other users.

A CEX is responsible of leeping your crypto assets safe while providing you with a user friendly platform where you can buy, sell, or trade within the crypto market. On a DEX, though, you are responsible for keeping your crypto assets safe and you’ll be interacting with other traders without any middleman.