What is financial market and its types?

Like any other financial market, Forex is also tied to the logic of supply and demand. And for this reason, any trader should place in his "basic" baggage the understanding of the principles that move the supply and demand of the market. The contrast of these forces is the mainspring that can trigger the upward or upward evolution, reduction of a financial instrument and, in our case, of a currency. But what is the offer in Forex? And what are the determinants that lead supply and demand to influence what happens within the currency markets?

Three different market situations

If what we have written above is sufficiently clear, you should know that the market can only be found in three different states:

1. Demand exceeds supply:

there is a competition between market participants on the purchasing side. Such a situation favors the increase in the prices of the reference goods, given that there will not be enough goods on offer to satisfy all requests;

2. Supply exceeds demand:

There is a competition between market participants on the sales side. Such a situation favors the decrease in the prices of the reference goods, given that there will not be enough questions to be able to absorb all the offers;

3. Supply and demand coincide:

in this scenario, the market is in a condition of equilibrium, and there is no competition between the participants to buy and sell. The market provides an equilibrium price that allows everyone to buy and sell exactly what they are willing to buy and sell. An optimal condition, therefore, as both consumers and sellers of goods and services can be well satisfied.

As you can well imagine, the situation of equilibrium is a particularly precarious situation, as it will tend to move away from the equilibrium continuously. For instance, a deviation will cause competition to increase on-demand or offer side, depending on where "force" hangs, thus pushing prices back into the equilibrium area. In other words, competition on the supply or demand side eliminates itself, leading the market to the new equilibrium point.

What is financial market

The financial market is a market in which people and organizations can trade financial instruments, raw materials, and other fungible goods, at a price that will be determined by supply and demand (which we talked about in the previous paragraphs). The markets find their balance on the opposition of two counterparties. So, the buyers and the sellers perform the main function of putting in contact who is interested in buying and who is interested in selling, in such a way that both parties can "find themselves" With greater ease.

 Even in this case, we can only make a brief parallel with any local market: if there was no meeting place between fruit and vegetable sellers and buyers interested in vegetables. Finding our favorite foods would be much more complicated. The same thing happens on the financial markets, with the only difference that to become the object of the exchanges are above all instruments - precisely - financial, and that today the dematerialization of the transactions has created a "non-place" of exchange.

Various types of financial markets

Of course, there is no single market for financial instruments, but as many markets as there are financial instruments that can be bought or sold. Let's see together what the main forms of the market are to which you can refer.

Capital market

The capital market has the objective of allowing issuing companies to find financial resources with a long-term perspective. It can be related to a primary and a secondary approach and can be divided into two subgroups, such as that of bonds and that of shares.

Intuitively, the bond market is a market in which bonds are bought and sold, i.e., debt securities through which companies seek to obtain financing, while the stock market allows companies to share part of their own with the indistinct public participation.

 Equally intuitively, the positions of bondholders and shareholders will be drastically different, and we will talk about it in specific details. It is sufficient to remember that whoever buys a bond becomes a creditor of the company. It is obtained for this position a periodic coupon (except in the case of zero-coupon bonds) and the nominal value of this investment at maturity, possibly increased. Those who purchase a share, however, participate in corporate risk capital, exercising administrative and property rights.

As far as the subdivision between primary and secondary markets is concerned, the primary markets are those relating to the "new issues," i.e., the sale and purchase of shares and bonds that are issued for the first time. The secondary markets, on the other hand, are the markets in which buyers and sellers exchange financial instruments not newly issued, but already circulating within the capital market.

If the above is not clear enough: it is completely normal to have a pinch of bewilderment when you relate to these concepts for the first time. And, just to further complicate the scenario; it can be useful to remember from this premise that financial instruments are not always traded within regulated markets. It is, in fact, possible that buyers and sellers agree outside of these contexts, following up an "over the counter" exchange. This is the case, for example, of two parties that choose to buy and sell shares in companies that are not listed on the stock exchange markets.

Forex

The Forex is one of the financial markets more known by all the people who come to the world of online investments by offering specific brokers who specialize in providing services trading on the currency market.

For all those who have not yet known about it, Forex is the market in which it is possible to exchange one currency against another. For example, by buying dollars in exchange for euros, Swiss francs in exchange for yen, pounds in exchange for rubles, and so on. This is the most liquid market in the world, where - for daily - exchanges of over 5 trillion dollars take place. It determines a whole series of further consequences: among the various, the possibility of being able to open and close your positions in real-time, given and considered that with such a high volume of exchanges, your position will hardly be "unexecuted."

Commodity

Another market, particularly known to online traders, is that of commodities, which often end up being the assets used as underlying assets for derivative instruments. Without going too far with the detail of these products, we can briefly recall how the commodity market (raw materials) includes dozens of different assets. This way, the investor will naturally be able to choose his favorite to meet the needs of financial diversification.

It is possible to divide the raw materials into "hard commodities," referable to all the products that are normally "extracted," such as gold, oil, copper, iron, and so on. The soft commodities are instead of all those typically agricultural raw materials, such as wheat, cotton, coffee, sugar, and so on. 

Derivatives

Another market particularly dear to the online trader is that of derivatives. Derivatives are particular instruments whose value is determined by the value of an underlying asset, such as a share, an obligation, a raw material, a currency, or even a mortgage. The "original" objective of derivative instruments is to be able to guarantee adequate coverage of risks (exchange rate, interest rate, etc.). In reality, over the years - and with the advent of the web - the investment in derivative instruments has ended up taking on a predominantly speculative key.

Moreover, as is the case for the capital market, the derivative financial instruments market can also be divided into two parts: in the first one, we find all the standardized instruments for a "future" exchange, at predetermined or pre-determinable conditions. In this exchange-traded market, futures, call options (which provide a right to purchase), or put options (which provide a right to sell) can be purchased. In the second part, over the counter, the contracts are instead exchanged between two counterparties without the use of services by intermediaries.

Insurance market

Financial markets may well also lead to insurance sectors. In the financial insurance market, various types of instruments can be exchanged, useful for being able to hedge against different risks. The insurances that can be purchased within this market are used to transfer the risk of a loss from one side to the other, in exchange for a payment.

In light of the above, the outlook that you can draw from it is evidently quite rich and complex. You have already guessed that investing in a market (such as the equity market) will be very different than investing in another market. For instance, the derivative instruments have the characteristics of the operation, risks, time horizons, and much more. Precisely for this reason, some traders aspire to invest in a particular sector and reject the idea of ​​doing it in another. And for this reason, other traders - often the most forward-looking - take the opportunity to evaluate these divergent to create a better diversification of their portfolio.

Author: Vicki Lezama