Introduction to Financial Markets – What to Know Before You Trade
Trade the financial markets and make money – that’s a statement packed with all the allure of a tropical holiday. But, and especially for the aspiring trader, there is an undertone of danger in it too, like storm clouds on the horizon when you’re sitting on the beach. Yes, there’s a possibility that trading will yield wonderful profits, but because of volatility, and the many things that can affect a trade at any given time, there’s also the possibility of major loss. So, because of that, the main reason aspiring traders never become actual traders, is due to the danger of the loss outweighing the excitement of the win.
But the hesitation also comes when the concept of trading isn’t fully understood. If you’re reading this, and you want to trade but don’t think you fully understand the art of it quite enough, here is a quick introduction to financial markets. Maybe reading the basics will build your bravery – even if it’s just enough to get started.
Understanding of financial markets
If you’re looking to get started in the financial markets, there are a few things you need to understand, namely:
• What are the financial markets?
• How do the financial markets work?
• What are the kinds of risks you could be facing?
With that said, let’s take a look at some of the key concepts you need to know about the financial markets.
What are the financial markets?
A financial market is a market of securities and derivatives, and these are bought and sold by traders online.
The first thing you need to know about the financial markets is that they’re constantly changing. Prices for stocks, bonds, and other securities go up and down all the time. This is because people are constantly buying and selling securities and derivatives, and the demand for these can change at any time, depending on the market.
Simply, though, a financial market facilitates the interaction between businesses who need a capital injection, and want to sell shares to get it, and those that have that capital.
How do the financial markets work?
Investing in the financial markets is a way to make money by buying and selling securities. When you buy a security, you’re betting that the price of that security will go up. If it does, you can sell it for a profit. So, the goal as a buyer will be to buy at the lowest price, with the hope that the market does well enough on that trade, so that you can sell at the highest price.
However, if the price goes down, you’ll lose money. And that’s where the hesitation comes – because it’s all about betting and knowing the market well enough to predict an upturn. Anything can happen in the trade.
What are the kinds of risks you could be facing?
You need to have a basic understanding of how the financial markets work before you can start investing. The financial markets are complex, and there’s a lot of risk involved. Before you start investing, make sure you understand how the financial markets work and what kinds of risks you’re taking.
Here are the five most common kinds of risk to understand:
• Systematic – the overall mood, performance and impact of the market
• Unsystematic – uncertainty around one particular asset, or one particular company in the market
• Political – the impact of a specific government, or particular political decision or regulation change
• Country – the impact of unrest or uncertainty within a specific country
• Interest rate – the impact of changing, or fluctuating, interest rates
And there you have it – an introduction to financial markets. If you want to trade, but are feeling unsure, use this quickfire guide in conjunction with a good demo platform – like the one you get on MetaTrader 5, when you create a profile with Top Trader Market. You’ll soon be well on your way to understanding the ebbs and flows, intricacies and habits of a given market. And then, the profits will come.
