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Contrary to what you may believe, there is more than one financial market. Some people initially consider only the stock market, but that’s just one form.
To become confident navigating through the world of investing, it’s important to understand basic terms and concepts.
At a basic level, financial markets are the exchanges in which people trade financial securities, bonds and commodities, at low transaction costs and prices that reflect supply and demand.
The purpose of a financial market is to set prices for global trade, raise capital and transfer liquidity and risk.
The Stock Market
The Stock Market is just one of many financial markets, the one I expect you’re most familiar with.
It is based on a series of exchanges in which large corporations ‘approach’ investors to raise capital and expand their business.
Stocks are shares of a public corporation’s ownership that are sold to investors through broker deals.
The investors profit when the companies increase their earnings. This keeps the economy moving forward.
It’s easy to buy stocks, but not so easy to know which ones to buy, from where, and at what time.
The Bond Market
The Bond Market is where organisations obtain very large loans. When stock prices rise, bond prices fall.
There are three types of bonds: treasury bonds, corporate bonds and municipal bonds.
Bonds also provide some of the liquidity that is integral to a functioning economy.
It’s important to understand the relationship between treasury bonds and yields, as when bonds go down, the yields go up to compensate.
It’s like a see-saw, ripple effect that impacts all aspects of the financial system.
When treasury yields fall, so does the value of the dollar. This makes import prices rise, which can trigger inflation.
When analysed, treasury yields can predict the future.
The Commodities Market
The Commodities Market is where companies offset their future’s risk when buying or selling natural resources.
Oil is the most important commodity, with widespread use across the globe. If oil prices rise, in turn you’ll see the effect in gas prices about a week later. If those two stay high, food prices will be impacted.
Just how big are the markets?
The total global financial assets market is over $294 trillion.
That includes US$69 trillion in the stock market, with the rest made up of a wide variety of government and corporate bonds.
Bear in mind this already large figure does not include property, which is an additional asset class in diversified portfolios.
It also does not include the derivative market, which some estimate to be worth $1.2 quadrillion.
I’m not even sure what that is, but it sounds like a terrifyingly high amount.
By breaking down each market into segments, you can drill into the details of what is happening in an economy.
To learn more, you can find all of our analysis and commentary on global markets on this page.
Don’t forget the world is a big place. There could be better opportunities for you out there. Investing globally instead of just locally is a good idea.
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