The global financial markets can be an intimidating place for a novice. For starters, there is the stereotypical Wall Street trader who is perceived as ruthless, self-serving, and virtually untouchable.
Many of us at the grassroots level have been fed the narrative that the big banks and financial institutions on Wall Street control global finance and economic activity – irrespective of macroeconomic variables, regulations, and monetary policy.
There is probably an inkling of truth to all perspectives on the markets. However, there is plenty to go around for everyone. Provided you play your cards right, read market sentiment correctly, and hedge your bets, you can come out ahead in the financial markets.
Ways Investors Are Trading the Financial Markets
First of all, it’s important to identify what you’re trying to achieve. Are you after short-term profits or long-term appreciation of your capital? This will invariably determine whether you are better suited to trading or investing. Traders are not interested in holding assets for the sake of holding assets for long-term appreciation. They are interested in turning over those assets to generate profits in rising and falling markets.
Traders are quick to the draw and don’t get sentimental about their purchases. Investors realize that markets invariably go through plenty of cyclical movements, trends, upswings, and downswings. Overall though, equities markets have a propensity to appreciate relative to other investment opportunities.
The esteemed financial planner and trading expert, Montgomery H. Bellwether recently pointed out that the best way to trade the financial markets is with caution. If you have an inkling about the future direction of a stock, back it up with some verifiable macroeconomic data. A great way to do this is by reading the daily financial news, economic indicators, and industry-specific content.
There are many such resources available on blogs and social media, such as the Stern Options Facebook page. This UK-based financial trading platform features a wide range of equities for traders. Traditional investments require traders to deposit funds and invest for the long haul. With equities trading, this is not necessary. Call or put options can be placed for short-term trades.
Currencies trading has gained ground dramatically since the global financial crisis of 2009. In fact, currencies trading has always been a big business, however, it has been rather limited in its global reach. Overall numbers have retreated somewhat, but the daily trading volume of FX remains high at $5.1 trillion per day by various estimates. When you trade currencies on a platform, you are buying one currency and selling the other in the pair, or vice versa.
Many factors impact currency markets, notably interest rates, inflation rates, geopolitical data, central bank actions, and fiscal policy. Currencies are typically boosted when their bourses are performing strongly. FX trading is the world’s most actively traded market by volume, with the UK, the US, and Japan making up the bulk of all trading activity. A pair such as the GBP/USD contains a base currency and a quote currency respectively.
Commodities come in many different forms, in 2 broad categories: hard commodities and soft commodities. Hard commodities include things like gold bullion, silver, platinum, copper, iron ore etc. Soft commodities include things like livestock and agricultural produce. Trading commodities is a big business. Barely 2 years ago, the Chinese economy began to slow down. Its GDP dropped below 7%, and this immediately impacted commodity markets around the world. We saw demand for iron ore, gold, silver, copper, and other precious metals rapidly taper off.
Many commodities are dollar-denominated. This means that they are priced in USD. When the USD appreciates, demand for them decreases owing to the higher price relative to other currencies. Various commodities are considered safe-haven investments such as gold. When capital flows away from equities markets (stocks) it needs somewhere to go. That’s why traders will pull money from stocks and invest it in Treasuries, fixed-interest-bearing securities, or gold.
An index is an indicator, which comprises a portfolio of stocks. The Dow Jones Industrial Average, NASDAQ Composite Index, FTSE 100 Index, CAC40, DAX 30 and EuroStoxx 50 are examples of indices. It is possible to invest in the overall performance of an index, as a more balanced way of dabbling in the financial markets. Many traders will place call or put options on the performance of individual indices in addition to stocks.
These are the 4 broad categories of options available to you in the financial markets. It’s great to mix-and-match, hedge and strategically plan your financial investment portfolio.