What Is The Financial Market?

A financial market forms part of a global ecosystem and refers in general to any marketplace where financial assets are bought and sold.

There are physical stock exchanges in major financial centres, such as London, New York, Chicago, Tokyo, Sydney, Moscow etc. The trading sessions take place within the local business hours of these cities between Monday and Friday.

Trading can be a physical purchase of assets or through derivatives, both exchange and OTC traded, allowing traders from all over the world to buy and sell a variety of currencies and commodities via online platforms.

What Can We Buy or Sell?

There is a wide range of assets available for trading:

  • FX world currencies, combined in pairs (for example, you can buy euros for dollars, trading on EUR/USD)
  • Stocks of major companies (Apple, Facebook, Coca-Cola etc.)
  • Energies (such as oil and natural gas)
  • Metals (gold, silver, platinum)
  • Indices (Dow Jones, Dax, S&P 500 etc)
  • Futures, contracts for the future supply of products (on cotton, soybeans, wheat, etc.)

Traders And Trading Platforms

Traders (sellers and buyers) make transactions between themselves. Approximately 85% of them are speculative traders, who don’t need physical barrels of crude oil or bags of wheat: they seek to profit from the rise or fall of an assets’ prices.

To trade, they use online platforms, such as Metatrader or cTrader, which provide live prices, multiple order types and analytical tools.

When traders believe that the price of an instrument will increase, they place a “Buy” trade, in the hope of earning as the price rises and closing the trade in a profit. When they believe that the price will decline, they will “Sell” in the hope of earning a profit as the price falls.

If the trade goes in the opposite direction to the traders’ forecast, they will make a loss. Once a trade is ‘’closed’’ the Profit or Loss will be added or deducted to the Account Balance.

Supply And Demand

The price (quotation) of an instrument changes constantly, often updating every second, reflecting the supply and demand for a specific product throughout the world.

When there are a lot of people on the market who want to buy an asset (currency, stock, metal), the demand subsequently grows.

As the demand begins to increase, so does the price. This is because the bidders become so interested in opening a Buy position that they are willing to accept a higher price.

Conversely, when there is a low demand for a product, prices will generally fall, as more and more traders are selling, and this forces buyers to agree with prices that are not ideal for them.

It is important to note that whilst global supply and demand has a significant influence on the pricing of the asset itself, the speculative (CFD) market pricing is derived from the asset’s price and is not influenced by the demand/supply for the CFD product.

Price Changes

Factors that affect an asset’s quoted price include among others:

  • News: Negative data for any country leads to a decrease in the value of its national currency. Positive data, on the other hand, can lead to increase.
  • Central Bank policy: Interest rate decisions and the statements of the central banks’ representatives.
  • Corporate reports: companies whose shares are listed on the stock exchange regularly publish their financial results. These figures can have significant effect on the share’s price especially if they are significantly different from analysts’ expectations.
  • Government data: Includes the unemployment rate, inflation level and trade balance reports. Markets closely follow not only the numbers but also any comments made regarding changes to monetary policy.

Financial Market Participants

Now let’s find out who are the main financial market participants.

Major Banks
UBS, Deutsche Bank, JPMorgan Chase, Citibank, and Goldman Sachs conduct a huge number of daily transactions on foreign currencies and FX derivatives, both for their own purposes and at the request of their clients (corporations, governments, hedge funds, large private investors).

Governments And Central Banks
The main representatives of this type are European Central Bank, the Federal Reserve System, the Bank of Japan and the Bank of England, who are responsible for managing the national currency rate and control the presence of other banks on the market.

Small Banks, Commercial Companies And Hedge Funds
They participate in the selling of products, exchanging one physical currency for another (and may also be involved with speculative trades).

Brokerage Companies
These are intermediaries between private traders and the financial market. With the services of an online CFD broker, you can trade online from anywhere.

Financial Market Overview

Let’s recap the most important factors of this lesson:

  • The financial market is made up of buyers and sellers. Transactions can take place at a physical exchange or through OTC derivatives via online platforms which allow speculation on price movement.
  • A range of assets are available including Foreign Exchange, Precious Metals, Stocks & Indices, Futures and more.
  • Traders Buy to earn from an increase in price and Sell to earn from a decrease. Traders incur a loss when the trade goes in the opposite direction to their forecast.
  • Supply and Demand heavily influence the price movement, as well as market news, Central Banks’ policies, financial results releases and macroeconomic data reports.
  • The financial market participants include major and central banks, governments, small banks, hedge funds and brokerage companies.