Welcome back, trader!
Settle in and get ready, because today we're going to help you understand quickly, concisely, and clearly; what are our different fields of action towards success: the financial markets.
What are financial markets?
Each market is an ecosystem. Like a country, with its own culture, rules, and citizens. These are the spaces where the exchange of financial assets between buyers and sellers takes place.
Assets can be stocks, cryptocurrencies, bonds, currencies, industrial commodities, and many others.
Why are they relevant?
Your business can grow and expand: If you need capital to finance your operations, you can issue shares or bonds on the stock market (for example). This can allow your business to obtain the capital it needs to buy new equipment, expand its production, or hire new employees.
They provide liquidity: Easy sales and without much margin of loss in value. This is very important for us as investors, to be able to sell our assets quickly according to the situation that is most favorable to us.
They make it possible to transmit risks between parties: An oil importer can buy oil futures contracts to protect themselves against oil price volatility. In this case, the oil importer is buying a futures contract that obliges them to buy a certain amount of oil at a certain price on a certain date in the future. Therefore, the oil importer can protect themselves against the possibility of oil prices rising before they need to buy the oil.
They provide very valuable information: that is essential to use to make the most profitable decisions about how to invest our money, finance our operations better, and manage risks and opportunities better.
Types of financial markets
We can classify them in different ways, but this time we will organize them according to the assets we trade in each one:
Fixed income markets: Financial assets with a fixed return are traded, such as bonds, obligations, rental real estate, and savings systems such as time deposits. Generally, long-term investments are made in these markets and they do not involve too much risk.
Variable income markets: Financial transactions with a variable return are carried out here, such as company shares. The most well-known investment in the universe of this market has its name and surname: stock exchange. Operations can be more risky, since the return on the investment is not guaranteed (there are many factors at play), however, it has many possibilities for great profits, with smart moves.
Foreign exchange markets: Forex, the largest financial market, with the highest monetary yield in the world, where we trade currencies from all over the world. Known especially for the massive volume of its transactions, and its very high liquidity, transactions can be made quickly and easily, and spreads (small costs included in the bid price (bid) and ask price (ask) between currency pairs) are usually very accessible.
Commodity markets: In this section, we talk about natural basic products, such as oil, gold, corn, natural gas. In commodity exchanges, or commodities, as they are also known, products are traded through futures contracts and each product has its own market.
Derivative markets: In these markets, we trade derivatives, that is, financial instruments whose value is derived from the value of a different asset. Tools are used that certify the future price of the purchase or sale of the underlying asset, preventing the probable upward or downward variations in the price generated on the product. Futures contracts and swaps (agreements between two parties to exchange cash flows at a specific time) are the most applied types of derivatives.
It is important to keep in mind that each market has its own personality and carries its own risks and that there are no perfect or infallible formulas.
The more you invest your time and money in optimizing your education, to understand which tools are truly valuable and useful for your growth and evolution, the more opportunities you will have to materialize your goals.
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For this article, prompts have been used to request information
interpreted and provided by AI (Google Bard). Written and edited
by Kevin David Terán and verified by Pedro Arizaleta and Erwin Sánchez