Understand the basics with our interactive market course.
A financial market forms part of a global ecosystem and refers in general to any marketplace where financial assets are bought and sold.
There are physical stock exchanges in major financial centres, such as London, New York, Chicago, Tokyo, Sydney, Moscow etc. The trading sessions take place within the local business hours of these cities between Monday and Friday.
Trading can be a physical purchase of assets or through derivatives, both exchange and OTC traded, allowing traders from all over the world to buy and sell a variety of currencies and commodities via online platforms.
There is a wide range of assets available for trading:
Traders (sellers and buyers) make transactions between themselves. Approximately 85% of them are speculative traders, who don’t need physical barrels of crude oil or bags of wheat: they seek to profit from the rise or fall of an assets’ prices.
To trade, they use online platforms, such as Metatrader or cTrader, which provide live prices, multiple order types and analytical tools.
When traders believe that the price of an instrument will increase, they place a “Buy” trade, in the hope of earning as the price rises and closing the trade in a profit. When they believe that the price will decline, they will “Sell” in the hope of earning a profit as the price falls.
If the trade goes in the opposite direction to the traders’ forecast, they will make a loss. Once a trade is ‘’closed’’ the Profit or Loss will be added or deducted to the Account Balance.
The price (quotation) of an instrument changes constantly, often updating every second, reflecting the supply and demand for a specific product throughout the world.
When there are a lot of people on the market who want to buy an asset (currency, stock, metal), the demand subsequently grows.
As the demand begins to increase, so does the price. This is because the bidders become so interested in opening a Buy position that they are willing to accept a higher price.
Conversely, when there is a low demand for a product, prices will generally fall, as more and more traders are selling, and this forces buyers to agree with prices that are not ideal for them.
It is important to note that whilst global supply and demand has a significant influence on the pricing of the asset itself, the speculative (CFD) market pricing is derived from the asset’s price and is not influenced by the demand/supply for the CFD product.
Factors that affect an asset’s quoted price include among others:
Now let's find out who are the main financial market participants.
UBS, Deutsche Bank, JPMorgan Chase, Citibank, and Goldman Sachs conduct a huge number of daily transactions on foreign currencies and FX derivatives, both for their own purposes and at the request of their clients (corporations, governments, hedge funds, large private investors).
Governments and central banks
The main representatives of this type are European Central Bank, the Federal Reserve System, the Bank of Japan and the Bank of England, who are responsible for managing the national currency rate and control the presence of other banks on the market.
Small banks, commercial companies and hedge funds
They participate in the selling of products, exchanging one physical currency for another (and may also be involved with speculative trades).
These are intermediaries between private traders and the financial market. With the services of an online CFD broker, you can trade online from anywhere.
Let’s recap the most important factors of this lesson: