Beginner
Introduction to financial markets
Welcome to the Flatcurve.com Trading Academy! Let’s begin with the basics – understanding what financial markets are and a few essential concepts you should know.
What are financial markets
Financial markets are platforms where individuals and companies buy and sell various assets, including currencies, commodities, stocks, indices, cryptocurrencies, and more.
People have been trading in financial markets for centuries, originally driven by the need for efficient buying and selling and for companies to quickly raise funds.
Over time, these markets have expanded in size and speed, making them more accessible than ever. What was once exclusive to big banks, financial institutions, and the wealthy is now open to a much wider audience
Asset classes
There are many types of financial markets, which are grouped into categories known as asset classes. Here’s an overview of some you might come across
Forex
Also known as FX, the forex market involves the buying and selling of global currencies—such as the British pound, US dollar, euro, and more—around the clock, 24 hours a day.
Commodities are physical assets used or consumed by individuals, animals, or industries. Prominent examples include gold, silver, and oil.
Stocks
Also referred to as equities or shares, trading stocks means investing in a specific company listed on a stock exchange. Well-known examples include Apple, Netflix, and Microsoft.
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Indices
An index measures the price movement of a collection of stocks. For instance, the S&P 500 (US 500)—one of the world’s most widely traded indices—represents some of the largest publicly listed companies in the United States.
Fixed income
Fixed income includes any asset that provides the owner with regular, predetermined interest payments. Bonds are the most common example, but there are many types of fixed-income assets available.
Cryptocurriencies
The latest addition to asset classes, cryptocurrencies are digital currencies secured by cryptography rather than a central bank. Bitcoin, the first and most well-known cryptocurrency, leads the market.4o
What affects the markets?
While each asset has its own specific factors that influence its price, all markets are primarily driven by the fundamental principle of supply and demand.
Supply
Supply refers to the amount of a financial asset available for purchase. When many people want to buy an asset but the supply is limited, its price will typically increase.
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Conversely, if supply increases while demand remains the same, the price will usually decrease
Demand
Demand refers to the number of people looking to buy a financial asset. When demand is low and supply is high, the asset’s price will generally decrease.
If demand increases while supply remains steady, the price will likely go up.
Various factors can cause the supply of a financial asset to change. For instance, a central bank might expand the money supply, increasing the availability of currency and potentially lowering its price. In contrast, the supply of gold depends on a vast network of companies, institutions, and countries worldwide.
On the demand side, a few important factors to watch out for include:
News: Many market participants monitor news in real-time; positive or negative headlines impacting a market can swiftly increase or decrease supply or demand.
Central bank policy: Central bank decisions – such as interest rate changes – can have a profound effect on the flow of money around the world, and will have a significant impact on demand
Government data: Releases from the government, such as unemployment rates or inflation figures, can influence demand. These reports provide insights into the health of an economy, potentially making it more appealing to investors.
Who trades financial markets?
There are wide range of people and companies that buy and sell financial markets.
Institutional investors
Pension funds, asset managers, and mutual fund providers engage in financial markets to generate profits for both themselves and their clients.
Brokers
Brokers execute trades for their clients, primarily consisting of retail investors and traders.
Retail investors
Everyday investors and traders can take part in financial markets by buying and selling currencies, investing in commodities, and engaging in various other activities.
Banks
Banks mostly act like brokers for other companies, such as funds. However, some banks also participate in the markets on their own behalf
Before we take a look at each asset class in more detail, there are a few important concepts that underpin how markets work: bulls and bears, volatility and liquidity.
When bulls outnumber bears in a market, a significant number of people will be looking to buy. As a result, demand is high and may exceed supply, leading to a bull market where prices reach new highs.
Conversely, when bears outnumber bulls, many people will be attempting to sell. This results in low demand and potentially increased supply, creating a bear market where prices decline.
What is volatility?
Volatility refers to the extent to which an asset’s price fluctuates over time. Bulls and bears rarely exert complete control over a market; rather, the price tends to oscillate as one group gains dominance and then the other.
If you examine the price chart of nearly any market, you will witness volatility in action. Markets with high volatility experience substantial price movements, creating numerous profit opportunities, but they also come with heightened risk. Traders who are willing to take on more risk may seek out volatile assets, while those who are more risk-averse will prefer markets that generally exhibit less drastic price fluctuations.
What is liquidity?
Liquidity refers to the ease with which an asset can be bought or sold in a financial market. An asset is considered highly liquid if there are many potential buyers and sellers available at any time, allowing for trades to occur smoothly without significantly impacting its price.
Conversely, if buyers and sellers are few and far between, it can be challenging to find a suitable trade.
Liquidity plays a crucial role in financial markets. It allows traders to act swiftly and helps maintain competitive pricing. Markets that are less liquid are typically viewed as riskier compared to those that are highly liquid.