The global markets are the marketplaces where banks, investors, corporations and traders can buy or sell goods and services in all the countries of the world, or the value of the goods and services sold.
At one point or another, we’re sure you came across financial news which stated that global stocks dropped due to a recent political event between two powerful countries. For example, when President Trump called off the North Korea summit, stocks fell. Let’s find out the most important global markets work and the impact they have on your trades!
Types of Global Financial Markets
At the very beginning we described the global financial markets as broad marketplaces which host the activity of selling and buying goods and services in all the countries of the world. These markets have transparent pricing, a well-established set of rules and regulations regarding trading, costs, fees and a dynamic that fluctuates according to the economic and political trends. In the past, only powerful institutions or wealthy investors had access to it, nowadays, thanks to the fast-paced evolution of technology, everyone can buy and sell securities online.
Capital Markets are a fundamental part of the engine that keeps our economy alive. These financial markets bring buyers and sellers together to trade stocks, currencies, bonds and other assets. The financial capital is obtained in two ways: by selling stocks (in exchange for a partial ownership of the business) and by selling bonds (loans that the business will repay later with a fixed interest rate). Therefore, Capital Markets include the Stock Markets and the Bond Markets.
Stock Markets are the ones that provide companies access to capital and investors a partial ownership of the company. Depending on the activity of the company, investors can gain profit by buying or selling shares. Stock Markets contain two markets: the primary markets and the secondary markets.
The Primary Markets, also called “new issue markets” are the ones that issue a new security on an exchange. Issuing or selling stocks takes place through an IPO (Initial Public Offering), as a consequence, the amount buyers are willing to spend and sellers want to make is the one that sets the price of the stock.
Secondary Markets are the marketplaces where the exchange trading process takes place and investors buy securities or assets from other investors, rather than from the companies that issued the securities.
Bond Markets allow investors to loan money to a corporate or governmental institution through a debt investment. The institution borrows the amount of money for a certain period of time at a fixed interest rate. Instead of stocks, a company can issue bonds.
The Interbank Market is a decentralized global network where banks and other financial institutions exchange currencies between themselves.
This type of global market includes only the big players, as the minimum amount for an interbank deal is $5 million! Some of the most important participants are: HSBC in Asia, JP Morgan Chase and Citicorp in the United States of America, and Deutsche Bank in Germany.
The Forex Market is one of the largest decentralized global markets where currencies are traded. Also known as the FX or Currency market, this is where investors, traders, businesses, banks and governments exchange and speculate on currencies. The Forex market is open 24 hours a day, 5 days a week and it is the most liquid market in the world with an average daily turnover of $3.98 trillion.
Types of Stocks
As we already settled the fact that a stock you buy allows you to own a portion of a public corporation, let’s talk more about what type of stocks you can find on the equity market. The two main categories are: common stocks and preferred stocks.
Common stocks allow shareholders to share in the company’s profits through dividends or capital appreciation. Depending on the number of shares they hold, owners of common stocks are given voting rights. They can vote on the corporation’s affairs, such as the board of directors, mergers and acquisitions, and takeovers. Shareholders can gain profit if the company performs well under the changes of the market conditions, but in the same time, they can sell stocks for less money than their original costs.
Preferred stocks are also one of the most common categories and they have less potential for profit than common stocks. Issued by corporations, they are a combination of common stocks and bonds, as their value follows the course of common stocks prices and they always make a fixed payment.
Stocks can also be divided into industry sectors which represent the pylons of economy. Here are the main sectors:
- Financial (banks, investment funds, insurance and real estate companies);
- Conglomerates (global companies);
- Utilities (electric, gas and water companies);
- Basic Materials (companies that extract natural resources);
- Healthcare (health insurance, biotechnology companies, hospital management firms, medical device and drug companies);
- Technology (electronics manufacturers, software developers and telecommunications);
- Industrial goods (machinery, construction, fabrication and manufacturing companies);
- Consumer goods (companies that provide goods to sell to the general public).
An option is a derivative (a financial contract which obtains its value from a specific asset) that allows the buyer to purchase or sell securities (stocks or bonds) at an already established price upon a certain period of time. There are two major types of options in trading: the Call option and the Put option.
The Call option allows you to buy a security at an agreed-upon price (called strike price) to an agreed-upon date (called exercise date). You can gain profit when the stock price goes up, by purchasing it at the fixed lower price and selling it at today’s price.
The Put option allows you to sell a security (stocks, but also commodities futures or currencies) at a strike price anytime until the expiration date. You can gain profit when the strike price is above the underlying stock value, meaning that your purchase price was lower than your sale price.
Investors, no matter the level of experience, go through a lot trying to stay alert and focused on what happens around the world, as they need to make inspired predictions and finally, the best trading decisions. If they believe the economy is growing, they will choose to invest in stocks, as a strong economy helps companies to gain profit.
On the other hand, if they think there are no changes or the economy is slowing, then they will invest in bonds which are always a safer investment, but with less chances of profit.
There is a certain dynamic between securities that needs to be known by any investor. For example, if bonds do well, stocks lose value. This phenomena is known as the bear market and it happens when prices drop more than 20 percent from their 52-week high. Typically, this starts when a stock index drops significantly in a day or two of trading (stock market crash).
A stock market correction can affect any class of assets and it occurs when the market falls 10 percent from its 52-week high. This is usually caused by an event (political, economic) that generates panicked selling.