Financial Markets and Trading

Financial markets are systems that enable buyers and sellers to trade bonds, stocks, equities, international currency and derivatives.¹ These systems connect businesses looking to raise capital with people who have the money to invest in them.

Common financial markets include stock, bond and commodity markets.

• Stocks are shares that represent company ownership
• Bonds are issued by governments and companies to raise money, but do not represent an ownership stake
• Commodities refer to goods taken from the earth such as livestock, produce, natural resources and metals;² commodities trading strategies involve speculating on how the prices on products will fluctuate and investing accordingly

In capitalist economies, which are based on supply and demand with little governmental control, financial markets allow business owners and entrepreneurs to operate smoothly. Businesses can get capital from investors who trade their money for a percentage of profits or other financial returns on their investments.³

Read on to explore key concepts, strategies and issues involved with financial markets and trading.

Investing is risky because stocks, bonds, commodities and other funds can lose value depending on market conditions. There are a number of trading strategies and techniques to mitigate some of this risk. An investor could, for example, choose to perform a fundamental analysis or a technical analysis before investing.

This approach looks at various finance analytics for trading, such as:⁴

• A company’s overall earnings
• The economy of the country in which the company is operating
• Market conditions
• Other factors such as the company’s brand image and media coverage

Assessing these factors should yield a reasonable idea of how the company’s stock will perform.

This approach relies on historical patterns, particularly price and volume, to predict how assets will perform.⁵

• Traders who focus on short-term gains rather than long-term valuations might use a top-down approach: a macroeconomic analysis that looks at the overall economy before focusing on individual securities. If trading stocks, the trader would focus on economies first, then sectors and then companies
• Individuals looking to hold a long-term view of their trades might take a bottom-up approach, which involves analyzing individual stocks, to determine exactly when they might choose to buy or sell

Other approaches involve assessing the market and striving to capitalize on trends.

• A trend-following strategy involves buying a stock when others are buying it and selling when others are selling⁶
• A contrarian strategy involves buying a stock when people are selling it and selling when they are buying

Risk-management strategies, such as capping trades at a certain dollar value, setting a position for automatic sale when a stock reaches a certain price, and diversifying trades can help people invest more wisely.⁷

Understanding consumer behaviors and other market patterns can help improve a person’s chances of maximizing return on investment (ROI). Social media posts, blogs and opinion pieces can help traders gain a sense of market psychology and consumer sentiments. For example, if you know that people are enthusiastic about alternative energy, and governmental agencies in an area are working on building solar farms, you may consider investing in solar panels.

Traders might use intermarket analysis to guide investment decisions. This form of analysis involves examining how financial markets may affect one another. For example, you may look to see how prices at the commodities market affect stock market prices, or look at the bond market and other economic factors to assess how the stock market will likely fare.⁸ In general, when economic factors are shaky, people tend to hold onto their money rather than investing it, which has a negative impact on the market.

An understanding of stock market analysis relies on familiarity with these concepts:

• Liquidity: how easy it is to convert an asset into cash at its current market price
• Volatility: the amount of price shifting over time; more frequent price shifts than normal indicate that the market is volatile
• Order types: the terms under which one buys or sells a security; one can buy or sell immediately, set a specific price limit, or set a stop price so that the transaction won’t occur until the stock price reaches a specified amount
• Execution: completing a buy or sell order
• High-frequency trading: using software to complete large volumes of trades in less than a second
• Algorithmic trading: using mathematical models to determine which assets to buy and sell

In addition to stocks and bonds, other investment vehicles include options, which are the right to buy an asset at a certain price or on a certain date. An investor who chooses to buy an option is not obligated to buy the stock.⁹ Futures refer to a contract in which one agrees to buy or sell at a predetermined price and date.¹⁰

Investors can choose to pool their money into a fund that invests in stocks or other assets through exchange-traded funds or mutual funds, which are actively managed by fund managers. These types of investments are less risky than buying a stock outright because they’re diversified: No one is putting all of their money into one company.¹¹

The term “forex” refers to foreign exchange—the practice of trading various global currencies. In choosing this investment strategy, one could use a forex analysis to compare various currency prices and the factors impacting how each currency is valued.¹² For example, if economic indicators signal that the Canadian dollar is about to rise in value, a buyer might purchase Canadian dollars at their current price and sell them when they’re more valuable.

Derivative trading strategies essentially involve betting on how a person expects an asset to perform. Using this strategy, traders would buy or sell a derivative contract based on whether they think the asset will lose or gain value.¹³

Because the stock market can affect the economy, it is regulated in this country by the Securities and Exchanges Commission (SEC). This agency was put into place through the Securities Exchange Act of 1934 after the market crash of 1929 that resulted in the Great Depression.¹⁴

The Securities Exchange Act prohibits companies from providing false financial information and using other tactics to manipulate their stock prices to trick people into buying and selling. It also prohibits insider trading, which involves using non-public information about a company to influence stock purchases. For example, if you knew your spouse’s company was working on a confidential government contract that would bring in significant revenue, and you bought a lot of stock based on that information, you would be guilty of insider trading.

The SEC enforces its rules and regulations through lawsuits and regular audits of investment firms, brokers, fund managers and others in the industry. Firms caught violating laws and regulations are subject to hefty fines and may have their licenses revoked. Each year, the SEC releases the results of its audits and related activities to provide public transparency.¹⁵

Whether you’re already involved in investing or you want to move up in the world of stocks, bond markets and equity trading, you’ll be uniquely prepared with the Online MS in Finance and Analytics from the Leavey School of Business at Santa Clara University. Study with a faculty of experts and delve into experiential learning.

To explore how our Online MSFA can elevate and enrich your career, speak with one of our admissions outreach advisors today.