CIX Markets. Where the client comes first.

Guide to financial markets

Education – part 1
All you need to know about the financial markets …

A Financial Market is either a physical or virtual location where buyers and sellers meet to exchange financial instruments at prices determined by the forces of supply and demand. The Financial Markets can be grouped in different categories:

Capital markets that consist of:

Stock Market – The market where shares of publicly held companies are issued and traded either on exchange or through over-the-counter derivatives. The Stock Market, also known as Equity Market can be divided in two categories: Primary Market is marketplace where new issues of shares are first sold through initial public offerings (IPO’s) usually by the investment banks to institutional investors. The secondary in contrast is marketplace where investors purchase securities of assets directly from other investors, rather than from issuing companies themselves.

Bond Market – A market where Corporate and Government debt securities are traded. Similar to Equity market, Bond market can be split in two categories: Primary Market where debt securities are issued and sold therefore facilitating the transfer of capital from savers to the issuers and the Secondary Market through which investors buy and sell debt securities, amongst themselves, previously issued in the Primary Market.

Commodity Market, is marketplace which facilitates the trading of commodities. Commodities can be split in two types: hard and soft commodities. Hard commodities are commonly natural resources that must be mined or extracted in contrast to soft commodities being agricultural products or livestock (corn, wheat, rice, soybeans, pork, cattle etc.)

Money Market which provide short term debt financing and investment. The instruments traded in the Money Market usually have high liquidity and very short maturities. This market participants usually aim to borrow or lend in the short term, from several days to just under a year. Securities traded in this marketplace usually consist of negotiable Certificates of Deposits (CD’s), U.S. Treasury bills, federal funds and repurchase agreements (repos). Money market is seen as a safe place to invest in due to the high liquidity and short maturities of securities.

Derivatives market provide instruments for the management of financial risk. As the word “Derivatives” suggest, the market is “derived” from another market which is known as the underlying market. Derivatives markets can be based upon almost any underlying market which makes it gigantic in terms of total market value. Some market analysts estimate the derivatives market at more than 10 times the size of total world gross domestic product (GDP) however determining the actual size of the derivatives market depends on what considers being part of the market.

Futures market is a central financial exchange marketplace which provides investors with ability to trade standardized futures contracts on margin that is used as collateral to cover possible future loss in the positions. Futures contracts enable the contract holder to buy specific quantities of commodity or financial instrument at a specified price with a delivery of an underlying asset at a specified time in the future. Futures contracts are categorised as derivative instruments due to the fact these instruments are derived from another asset class.

The Insurance Market is a marketplace in which the redistribution of various risks is facilitated.

The Forex Market is a global, decentralized market for the trading of currencies. In terms of volume of trading, it is by far the largest market in the world. The main participants in this market are the larger international banks.

1.2 Financial Market Participants
Now, after exploring the playgrounds of financial markets, it is time to have a look at the Major Players themselves – the Financial Market Participants. The Market participants can be divided in to two main categories: Individual investors and Institutional Investors. Today’s influential market participants are mainly institutional investors, these include:

– Central Banks
– Commercial Banks
– Investment Banks
– Asset management companies
– Equity market-making firms
– Pension Funds
– Brokers; and
– Government Institutions

1.3 Financial Market Instruments
So far we discussed the financial markets and its participants, now, we will move on to what is actually traded on the Financial Markets. Essentially, there are two methods of trading financial instruments:

The first is Exchange Based Trading – conducted on centralised, regulated exchange, the exchange based trading involves the communication of bid and offer prices to all market participants. Due to the access to centralised pool of liquidity, and real time price transparency, the exchange based trading benefits the traders by ensuring that the most efficient and best price will prevail. Furthermore exchange based trading improves the execution and reduces the time delay.

The second is Over the Counter Trading (OTC) – unlike Exchange Based Trading, OTC means all securities are trade off the exchange, usually directly between institutions such as banks, through a dealer network interface.

1.4 Investor types
There are various trading strategies and styles of trading, some are more sophisticated than the others and can be based on very different principles and methods. More often than not however it is possible to categorise traders in two categories:

Speculators – Someone who trades securities with higher risk appetite in return for higher-than-average profit. Trading style involves buying low and selling high which distinguishes it from an investor with intention to make a return on capital.

Investor – Someone who is looking to generate a return on capital by taking on average or less than average amount of risk and studying fundamentals and other analysis before making investment decisions.