Category: Beginner Markets September 17, 2024

Global Financial Markets: Types of Financial Markets

When discussing financial markets, most people think of the stock market. They may not realize that there are many types of financial markets that serve different purposes. These markets exchange a variety of products to help increase liquidity. Each market relies on the others to create trust among investors. This interconnectedness means that when one market experiences a disturbance, other markets will react accordingly.

Stock Market

This market is a series of exchanges where successful companies raise significant amounts of cash for expansion. Stocks are ownership shares in a public company sold to investors through brokers or traders. Investors look for trading opportunities in a company when it increases its profits, which helps the economy grow. However, it requires substantial knowledge to buy stocks in the right company.

For many, the Dow Jones is synonymous with the stock market. “Dow” refers to the Dow Jones Industrial Average, which is just one way to track the performance of a specific group of stocks. There are also the Dow Jones Transportation Average and the Dow Jones Utility Average. Many investors overlook the Dow Jones and instead focus on the S&P 500 or other major stock indices to monitor progress in the stock market. The stocks that make up these averages are traded on global stock exchanges, two of which are the New York Stock Exchange (NYSE) and the Nasdaq.

Mutual funds allow you to buy a large number of stocks at once, making them an easier investment tool compared to investing in individual stocks. They effectively reduce stock market volatility and have a calming effect on the economy. Despite their benefits, it is still essential to learn how to choose good mutual funds.

Bond Market

When organizations need to secure very large loans, they turn to the bond market. When stock prices rise, bond prices tend to fall. There are many types of bonds, including Treasury bonds, corporate bonds, and municipal bonds. Bonds also provide some liquidity that helps keep the economy running smoothly. It is important to understand the relationship between Treasury bonds and Treasury yields. When the value of Treasury bonds falls, yields rise to compensate. Conversely, when Treasury yields rise, mortgage interest rates also increase. Worse still, when the value of Treasury bonds declines, so does the value of the dollar, leading to higher import prices, which can result in inflation.

Forex Market

The term “Forex” refers to the foreign exchange market, which is a global marketplace for foreign currencies. It is derived from the first letters of the terms in the English economic term “Foreign Exchange.” This market operates worldwide, where currencies are traded by various participants, such as global banks, international institutions, financial markets, and individual traders.

Features of the Forex Market

Financial analysts estimate that the daily trading volume in the Forex market is around $5 trillion, with billions of dollars being bought and sold every second. For example, a survey conducted by the Arab Advisors Group found that about 70,000 Jordanians trade in foreign currencies on margin (Forex) with amounts nearing $787 million.

Trading occurs by buying and selling major currencies that dominate Forex operations, including the US dollar (USD), the euro (EUR), the British pound (GBP), the Swiss franc (CHF), the Japanese yen (JPY), the Australian dollar (AUD), the Canadian dollar (CAD), and other foreign and Arab currencies.

Economic experts consider currency markets to be ordinary markets created by technology, which has recently facilitated their spread. Due to technological influence, the Forex market has attracted large groups of investors in recent years, thanks to the proliferation of technology and communication means.

Commodity Market

The commodity market is a specialized market for trading in primary and manufactured products, such as cocoa, fruits, and sugar. Hard commodities like gold and oil are mined. Investors have access to about 50 major commodity markets worldwide, with financial transactions increasingly surpassing physical deals involving the delivery of goods. Futures contracts are the oldest method of investing in commodities and are secured by physical assets. The commodity market can involve physical trading or derivative trades using spot contracts, future contracts, options, or forward sales. Farmers have used a simple form of derivative trading in the commodity market for centuries to manage price volatility risks.

A derivative contract is a financial instrument that derives its value from an underlying commodity. Derivatives can be traded on exchanges or over-the-counter (OTC). An increasing number of derivatives are traded via restructured entities, while some are settled centrally, providing settlement and stability services in the futures market, in addition to off-market settlement in OTC trading.

Derivatives such as futures and swaps (pre-1970s) and exchange-traded commodities (since 2003) have become key trading instruments in the commodity markets. Futures contracts are traded on organized commodity exchanges, while OTC contracts are negotiated directly between contracting parties.

Exchange-traded funds (ETFs) focused on commodities began emerging in 2003. Gold ETFs are based on “electronic gold,” which does not require holding physical gold bullion due to the additional costs associated with insurance and storage in places like the London Bullion Market. According to the World Gold Council, ETFs allow investors to target the gold market without the price volatility associated with holding physical gold as a commodity.

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