Varieties of financial markets.
What are financial markets? Why do they exist, how do they function, and most importantly how can a regular trader earn by buying and selling a variety of assets?
If you want to make money in the market, you must clearly know the answers to these questions. Today we will analyze them and talk about what place private traders occupy in a single organism of the global financial system.
Why do we need financial markets.
The global financial market ensures the redistribution of capital between participants and allows to achieve the optimal ratio of the supply of various assets and demand for these assets.
In other words, one market participant has certain resources, and can offer these resources to another participant, that is, capital works and brings profit to its owner. At the same time, thanks to financial markets, asset liquidity is achieved each of the participants can buy an asset or sell it at any time.
Instruments of financial markets. Assets.
A huge number of different assets are traded on financial markets currencies, gold, stocks, derivatives (futures, options), debt instruments. And all these tools serve to redistribute funds, to reduce the overhead costs that arise, as well as to achieve economic stability. Depending on the type of assets traded, markets are divided into different categories:
Currency market (Forex market) conversion operations are carried out here, one currency is exchanged for another. For example, a company that has an international trading network exchanges revenue received in the currency of the country where it has representative offices with the currency of its country.
Cryptocurrency market at the moment we can separate this market separately, however, it is very similar to the regular foreign exchange market in terms of its goals and essence. However, due to his youth, working in it is very different from working in other markets.
Token Market. ICO market. At the moment, it is an integral part of the cryptocurrency market but ideologically strives for the stock market. The youngest of the existing markets.
Stock market securities (stocks, bills, etc.) are traded here. In this market, corporations offer their shares in order to raise the funds they need for development, and investors buy these shares. By placing available funds in the stock market, the investor can make a profit in the form of dividends, as well as in the form of speculative profit, if the shares rise in price, and the investor decides to sell them;
Commodity market commodity assets (oil, grain, sugar, etc.) are traded on this market. Here, a producer of raw materials can sell his product, and a buyer who processes this raw material can buy it.
In addition to the assets themselves (currencies, stocks, goods), derivatives are traded in financial markets, which are collectively called derivatives. These include forwards, futures and options is these are varieties of the obligation to sell or buy a certain amount of the underlying asset after a specified time. Derivatives, unlike underlying assets, do not themselves have any collateral, but have value as contractual obligations. They are used for hedging or for speculation.
Futures and forwards and options are both deliverable and non-deliverable, the latter are intended solely for speculation, no assets are transferred for these obligations.
How do supply derivatives work?
For example, a manufacturing company is interested in a stable supply of raw materials, since supply disruptions are fraught with large losses. The manufacturer buys futures for the supply of the required amount of raw materials (for example, with delivery in three months) at a certain price and thus insures against price increases. The seller who put up the relevant futures for sale, in turn, insures that the raw materials will become cheaper after a certain time, as a result of which he may suffer losses.
How do non-deliverable derivatives work?
Contracts for the purchase and sale do not imply the need for the delivery of real assets, however, these tools are very popular among players whose purpose is speculative profit.
Quotations of non-deliverable instruments reflect the real prices of delivery contracts, and are also consistent with the prices of the assets themselves. At the time of purchase or sale, for example, futures, a certain amount is charged from the participant. This is not the value of the asset, but only guarantee security, a kind of pledge, this amount is returned at the close of the contract (term for performance). If, for example, a trader buys gold futures and sells it after prices have risen, he will be returned with guarantee coverage, as well as the difference between the purchase price and the sale price.
It should be noted that the market for non-deliverable derivatives is many times larger than the volume of other markets - according to various estimates, the global market for non-deliverable derivatives is more than quadrillion dollars.
Where are financial market instruments
How is the capital redistribution scheme implemented? How can participants in transactions in financial markets physically purchase or sell assets (derivatives)?
The place where the exchange of values or obligations takes place is the exchange platforms. Exchanges act as intermediaries between participants in transactions and receive compensation for their services. In other words, the exchange makes sure that all obligations concluded between participants in the transactions are fully implemented.
If, for example, we are talking about the sale of shares, the exchange accepts the amount received from the buyer as payment, and pays in favor of the seller only after the transfer of shares (rights to them) is completed. On the stock exchange, you can buy only the shares that are on the listing - a list of assets offered on the stock exchange, and the stock exchange fully guarantees the quality of securities, the mechanisms work so that any fraud is excluded here. In order for the stock to be included in the listing, it is necessary to carry out a number of rather complicated procedures, the exchange must be convinced that the securities are secured by the corresponding assets.
If we are talking about the sale of a raw material asset, for example, beef, then the exchange guarantees the conformity of the goods with the declared parameters (quantity, quality characteristics), as well as the timely delivery of this goods.
Who is a stock broker
Organizations that are licensed as a stockbroker can buy and sell assets on the exchange. Such a license is issued by government agencies that control the financial sector. Accordingly, the state guarantees the quality of the broker, as well as its decency, the compliance of the broker company with certain rules and regulations. Therefore, private traders and companies (without a license) can trade on the exchange only through a broker. However, this does not affect the speed of execution of orders, modern software allows the broker to process the client’s order within a couple of seconds.
However, there are assets with which transactions can be conducted not through the stock exchange - we are talking about conversion operations (Forex). Exchange one currency for another can among themselves banking structures that have the appropriate authority (defined by a banking license). The so-called interbank market is a network (Thomson Reuters and Electronic Broking Services (EBS)), to which many banks are connected using software. In the software interface, applications for purchase and sale are displayed, and bank employees perform conversion operations on behalf of their customers.
Participants in interbank networks are also Forex brokers who broadcast their customers a stream of quotes and bring their applications to the market. Applications are satisfied by liquidity providers (banking networks, investment funds) in favor of their customers (funds, large investors). We will talk more about the mechanics of the exchanges and the international currency market in an article on Forex.
Many assets can be bought or sold without resorting to intermediaries - brokers and exchanges. Buyers and sellers conclude direct transactions (forward contracts can be used) with an arbitrary order of goods acceptance and settlements (may use a deferred payment).
Mostly, these are assets that have a certain value, but with which the exchange does not work. This, for example, may be stocks that are not represented on the exchange, goods that cannot be standardized according to the rules of the exchange. However, shares can be purchased directly from the issuer, for example, Gazprom securities can be purchased at a branch of Gazprombank.
OTC transactions are risky enough. In the case of securities (especially OTC), difficulties may arise in the sale due to lack of demand (the securities will turn out to be illiquid). When delivering goods, there are no clear mechanisms to eliminate risks for the seller and the buyer.
Who benefits from speculators?
Financial markets mediate the redistribution of capital through assets that have any value. However, what about instruments that, in essence, are not provided with anything (for example, derivatives)?
As a matter of fact, the volume of trading in derivatives far exceeds the volume of transactions with secured market assets. This means the prevalence of speculators on the market, whose goals have nothing to do with the practical needs of those participants who are interested in the redistribution of capital. Nevertheless, ideal conditions have developed in the financial markets for speculators, and neither exchanges nor government regulators have any objection to their presence on the market.
Private investors include those who actually place available funds in a more or less long term, but the vast majority of traders are still speculators who open many positions and work intraday. The following conclusion suggests itself: speculators really need the market, but the question arises - why?
First you need to clarify that the current value of many assets to some extent reflects the state of affairs in a particular sector of the economy. A change in the value of some assets directly or indirectly leads to a change in the value of other assets, moreover, this applies to instruments that are traded in different markets. Thus, we can assume that the entire world economy is a single organism that needs balance.
It is precisely in order to achieve this balance that colossal money and the efforts of speculators, which are often called the “market mass,” are necessary. As soon as a private speculator sees an imbalance, for example, in the form of an undervalued asset, he buys derivatives and expects a price increase. Together with him, the market situation is monitored by other speculators and as a result of their efforts (aimed at making their own profit) a fair price is achieved. Such an effect cannot be expected from players pursuing non-speculative goals (dividends, hedging), from funds working in the long run.
The global financial market is a harmonious and fairly stable system that ensures effective work with capital. Due to the functioning of the markets, the costs that would arise during the conversion of financial assets are minimized. However, the main thing is that thanks to markets, society’s resources are used more rationally, capital is constantly in operation, as a result of which new material values are generated.
For a private trader, the fact that the market is a balanced organism means the possibility of constant earnings, because, in essence, market players pursue the same goals every day. In turn, the search for patterns allows you to track the movements that are currently taking place in the market and determine the point of the most effective application of efforts.