A Comprehensive Guide On The Types Of Trading Markets Available

Traditionally, trading involves the exchange of items between two parties. In most cases, this interaction often yields some kind of benefit for either party. All forms of trading follow the same give-and-take principle with the desire to earn a profit.

However, there is not a single market on which you can trade. This is because one can trade in several different financial instruments which are all processed differently. Therefore, the diverse options up for trade bring about differing trading markets.

What Is A Financial Instrument?

These are the commodities that you can buy and sell as you trade. The advent of the internet has made trading these items incredibly simple. Nowadays, you do not have to be physically present to buy gold, oil, or currencies. The global village phenomenon has made trading as easy as the click of a button.  

There are different options to trade in, and each one holds its advantages and shortcomings. As such, each one has a dedicated market on which you can participate in its exchange.

Types Of Trading Markets Available Today

1.      Forex Market

FX Trading Market

Ever since the introduction and widespread usage of currencies globally, there has developed a need to trade in this item.

For instance, if you want to do any business in a different country from yours, you need to comply with their financial laws, which include using their currency. To get it, you have to buy the same by exchanging your home country’s currency.

This sort of transaction takes place all over the world at a minute-by-minute interval. That said, the Forex Market is rightly so, the largest trading market with trillions of dollars’ worth of currency traded daily.

As the largest market, forex offers the best prospects of success when it comes to trading. This is ideal because of the vast information sources available on the market as well as trading resources tailored to trading in it.

Typically, traders buy and sell currencies in pairs, and along the way, specific pairs stood out as stable and hence offered a degree of predictability. These popular pairings are EURUSD, USDJPY and GBPUSD.

2.      Derivatives Market

Derivatives are a type of financial security whose value comes from a principal asset or assets. Derivatives’ reliance on an asset contributes to their price fluctuations. However, the cost of any derivative is tied to an agreement between two or more parties. Assets that linked to derivatives are often stocks, currencies, Contract for Difference (CFDs), and bonds.

Trading derivatives may occur over-the-counter or like other financial instruments on an exchange. At first, derivatives offered a standardized way to trade goods on the global market with balanced exchange rates. Today, derivatives are employed across a wide range of markets for speculative purposes and, by some, to evade risks.

Derivatives take several forms to fit into any investment need

Futures

Traded on an exchange, Futures oblige two parties to live up to an agreement to buy an asset at a price agreed upon and at an agreed-upon date.

Options

Unlike futures, options are not binding agreements. Instead, options provide a buyer with the opportunity to buy or sell an asset; it is not mandatory.

Swaps

Swaps allow you to switch from one cash flow option to another. Swaps will enable you to manage your interest rates by exchanging a variable rate of interest to a fixed interest rate.

Forwards

Like Futures contracts, forwards compel parties to hold their end of the trade agreement at a specific date. However, forwards are an over-the-counter transaction and as such, carry a higher risk of loss for either party. If one party is unable to hold its end of the deal, then the other one loses out on the trade.

3.      Commodities Market

Tangible commodities are often traded physically. The physical trade usually necessitates from the need to take delivery of your product. However, today’s commodities market has made it possible for prospective buyers to buy and sell hard goods remotely.

Commodities like oil, gold, grain, and other livestock items are available for trade via buying stocks, options or futures.

4.      Capital Markets

The Capital market is another well-known trading platform. The main items of trade here are stocks and bonds.

The stock market deals with companies whereby the shares of a company, private or publicly-held, are usually liable for trade.

Traders exchange company shares periodically as they aim for profit. Additionally, this market highlights the value of a company at a given time, hence the need to sell stocks when their value increases and vice versa when a company’s value drops.

In a nutshell, the stock market is another type of market where buyers and sellers of securities interact. As the number of market participants is large, the stock market can guarantee fair and transparent practices.

Just as in the FX market, the internet has a pronounced influence on the stock exchange. Earlier on, paper-based trade was the norm. However, traders can today carry out stock trading remotely from any corner of the globe without much hassle because of modern computer-dependent markets.

Additionally, government-issued securities are often used as debt instruments and traded in the capital market. The main aim of such a trade is to raise capital through the sale of bonds, the most common instrument issued out.

Which Market Should You Go For

It is without a doubt how great the diversity of financial instruments is. It comes as no surprise then, the ease with which traders opt to trade in only one market. As a beginner, this would needlessly make sense as you get to know your option of interest in the initial stages.

Seasoned traders are all too aware of the advantage of familiarity. It will be pointless to learn a new market instead of fine-tuning one in which you are well-versed.

There are some markets, however, that are better suited to newbies in the trading game than others. Tried and tested financial instruments are always the go-to for anyone getting into trading. That is why Forex rules the roost. Regardless, get a real feel for all the trading markets available before focusing on any single one.

Paul Mukara
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