Introduction to Financial Markets Trading
Financial trading involves the buying and selling of financial instruments with a profit making objective. These can be cash instruments, like shares, forex or bonds. They can also be derivatives, such as CFDs, futures or options.
In financial markets, millions of companies, individuals, institutions and even governments are all trying to profit from buying and selling financial instruments at the same time. This means that the prices of those instruments tend to constantly be on the move. A market that moves a lot is known as a volatile market. These markets bring more opportunities for profit, but also mean increased risk.
Financial instruments can be bought and sold in one of two ways:
They can be traded on exchanges, highly organised marketplaces where a particular instrument is bought and sold (like the London
Stock Exchange) or they can be traded over-the-counter, when two parties agree to trade instruments with each other (like when you trade CFDs with a provider).
Risk is a key concept to all types of financial trading. Managing your capital by balancing potential profit against risk is what trading is all about. Trading is not about being right on every trading decision that you make but is more about managing probabilities and being able to cope with the eventuality as well as the cosquences of being right or wrong.
Over the years, markets have grown bigger and faster. More people than ever before are now able to get access to these markets. Once they were only accessible to big banks, finance houses and very wealthy individuals, but now most people can access financial products to trade or invest in through online platforms.
Indices are made up of a basket of selected shares, and can be traded like an individual share. With the ability to buy or sell any given index, traders can speculate on the changes in price of the biggest companies in a single market. Examples of indices include the Dow Jones, S&P 500, Dax 30 and Nikkei 225.
Equities also known as shares represent the prices of shares in companies that are listed on major stock exchanges such as the London Stock Exchange, New York Stock Exchange or the Nasdaq. Popular shares/stocks listed on exchanges include Barclays, Facebook and Twitter.
A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets. Cryptocurrencies are classified as a subset of digital currencies and are also classified as a subset of alternative currencies and virtual currencies. Currently the 3 most popular are bitcoin, bitcoin cash and ethereum.
The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines the foreign exchange rate. It includes all aspects of buying, selling and exchanging currencies at current or determined prices. It is by far the largest market in the world.
Commodities trading involves trading or investing in physical substances like oil, gold, wheat, natural gas, silver and other softs or metals. Each commodity market will have its own particular cycles, determined by specific factors like time of harvests or market demand. Traders can take positions based on forecasted economic trends or arbitrage opportunities in the commodity markets.
Bonds are debt instruments issued by government which pay interest to investors, and can also be traded. Popular bond markets include the UK Gilts and US government 10 year and 20 year bonds.
Financial market moves are based on supply and demand. If more investors or traders want to buy a certain stock, commodity or currency than there are those willing to sell, then the market moves up in price until those buyers are able to buy. On the flip side, if more traders want to sell a stock, commodity or currency than there are those willing to buy, then the market moves down until the sellers are able to sell. Below are some factors that move the markets:
Many market participants keep tabs on news in real-time; bad news affecting a company or a country will drive prices down, for example. Even political news can have a wide-reaching effect on markets.
Central bank policy:
The main driver of the value of a currency is the interest rate environment in that particular country or zone, especially when compared to the other currency in the pair. Central banks make decisions such as setting interest rates, and these can have a profound effect on the flow of money around the world, and will have a big impact on markets.
Company results and earnings:
If the earnings of a company continue to grow, the odds are good that the stock price is also rising. Companies listed on stock exchanges will release regular results which will encourage investors to buy or sell their shares.
From time to time governments will release data which can trigger market moves. releases such as unemployment information, data on new jobs created, economic forecasts or inflation data can all give signals to investors or traders on whether to buy or sell into any given markets.
There are a wide range of individual investors, professional traders, fund managers and companies that trade in financial markets.
Institutional investors: Pension funds, asset managers and mutual fund providers participate in financial markets to make profits for themselves as well as their customers.
Banks play the role of brokers for other companies, like fund managers. New regulations limit the volume of trading that banks can do for themselves.
These specialise in placing trades for their clients when the clients want to buy or sell in any given markets.
The job of market makers is to get the best price possible for their clients. If a company decides to issue more shares, a market maker is given the job of selling them into the market to prospective investors.
These are ordinary people or investors and they can participate in financial markets through investing in shares and other investment funds, or actively trading the markets through spread bets and CFDs.
Advantages of Financial Markets Trading
Potential Opportunity to Invest in Yourself
Trading and investing can be challenging, just like most rewarding and fulfilling career paths. Every career has its own unique learning curve and how successful one is at navigating this curve is down to the individual. Top professionals have to learn and master their skills in order to get to the very top, it does not happen overnight. Learning how to trade and invest takes time, discipline, the correct guidance and the right attitude. Most people fail in trading because they lack proper guidance and the right education at the beginner stage. Trading is investing in yourself and your financial future to create a path to possible financial freedom.
Potential to Minimize Risk & Maximize Gains
Sound risk & money management principles only allow you to put at risk a small percentage of your capital at any given time. This means that even if the market moves against your position, your losses are limited to a small fraction of your capital and you still have most of your funds in reserve if other opportunities arise in the markets. The main reason why some new traders fail is because of a lack of understanding and/or lack of application of money management principles and techniques. Most traders utilise leverage without any knowledge of how this can wipe out trading accounts due to the magnified losses that can be incurred even during times of normal market volatility. Your strategy can focus on optimising capital growth by utilising strict risk management principles and trading techniques which only allow for small losses and bigger gains.
Ability to Long or Short the Market
Financial Trading allows you to profit from both rising and falling markets. In trading you do not have to own the actual underlying asset that you are trading. You only trade the price movement and this enables you to go Long or Short a given asset at any given time. As a technical trader you can make your trading decisions based on the price action of any stock/financial instrument and trade accordingly.
Ability to Use a Technical Approach to Trading
You can build your own trading strategies which help you decide when to enter and exit the market based on technical analysis. There are a wide range of technical analysis indicators and tools which can help you make informed trading decisions. However it is very important to backtest you trading stragegy to ensure that you fully understand the potential risk and drawdowns that can be incurred when applying it in real markets.