Understanding Trading: The Five Key Markets Explained

For those looking to either break into the world of investing or diversify their existing portfolio, it’s important to understand the five key investment markets: stocks, bonds, forex, physical assets and derivatives.

Some brokers will only offer access to a single market; others, like Sucden Financial, will offer a doorway to multiple markets. Thus, the markets you want to trade in must be taken into account when choosing the right brokerage service for you.

But how do you know which areas of investment are best suited to you and your goals? Read on to find out more…

The Stock Market

When the average laymen think of investments, they automatically think of the stock market. The stock market provides investors with the opportunity to buy and sell shares of ownership in publicly traded companies. As a rule, profit is secured in two ways: through capital gain and dividends. To make money through capital gain, you must invest in shares that experience an increase in value over time. Dividends deliver profit more directly, as they are essentially profit made by the company that is paid out to investors.

The Debt Market

Bonds are a feature of the debt market. The debt market is an arena utilised by government, companies and financial intermediaries. These bodies issue debt instruments in order to create capital. Debt holders essentially finance this venture with their capital, and the issuers compensate them by making regular payments to them via coupons. When the debt matures, they’re obliged to repay the principal accrued on it. Bonds are amongst the most common types of financial instrument that are issued, along with bills, notes and certificates of deposit.

The Forex Market

Those who invest in the forex market seek to make a profit by speculating on changes in the exchange rate between two currencies. They must purchase one currency through selling another, in the hopes that the one they buy rises in value against the one that they sold. Leverage is typically high as currency movements tend to be minimal and investments are short lived. This means that brokers may allow their clients to control around $500 for every $1 that they physically invest.

The Physical Asset Market

In the physical asset market, the aim of the game is to sell an asset at a higher price than the one you paid for it. These assets can be anything from livestock to raw metals, jewellery, property or even electrical goods. There is no set rule as to how much risk investing in physical assets carries, as this is dependent upon the specific type of asset that traders invest in. Some investments also involve greater on-going costs than others; for example, it costs more to keep horses than to hold gold.

Derivatives

The last type of major investment is rather different to any of the others; perhaps the simplest way to think of it is as an expansion of them. Derivatives are a security, meaning that their value stems from another asset, such as a stock, interest rate, currency or physical asset. When you invest in a security, you go long or short, purchasing the right or obligation to buy or sell it. The value of the derivative is linked to this underlying asset, rising and falling in line with its worth. The most common types are options, future and forwards.

Now that you have a better understanding of them, which market would be best suited to your investment goals?