Therefore, as mere ideas, opportunities can come and go on the “markets”. Just stepping back a bit, a “market” is like the same thing in everyday life, it’s basically where buyers and sellers meet. There’s a general market (which have “everything”) or specialized — fish market, flower market, produce market (fruits and veg etc), – these days there’s even online markets like eBay,TradingPost etc. I think back in my days in the Ship for Southeast Asian Youth Program, we visited 7 countries in 2 months, I like to check out the markets in every country we visited.
The markets are a bright contrast. I think it is a disadvantage to people living in “developed” societies not to have the daily scenes of a market. When we need something, we go to the “supermarket” where there is only one seller so they just post how much they want for something and that’s it. Not much excitement there. Being exposed to a “market culture” you can readily see the market in action, that there is movement, even chaos… prices go Up, when there are a lot of people buying, Down when too many sellers eager to sell, or Sideways when there is uncertainty, it could also be Quiet when there is not a lot of participants (e.g. low volume of buyers and sellers).
It is often a very fluid situation at the short term on any financial market. So I like to think about the financial markets as oceans, like the real world oceans, they are distinct (Indian, Atlantic, Pacific,) and yet they are one (interconnected).
Let’s cruise …
First let me describe some markets or investments and the opportunities they present
• Stockmarket / Equities
• Foreign Exchange
• Real Estate
The stockmarket is where a company’s stocks (also called Shares) are traded. An investor who wants to put his/her money expecting capital gains and/or regular income (“dividends”) could buy shares. Each “share” represents ownership of a company’s assets less its debt (net assets). A ‘share’ is issued by a company for owners’ to cash in on their investment or to finance its growth. After the first issue (or Initial Public Offering) , they are traded in the stockmarket so that people can get in or out of the investment.
You will also hear about an “Exchange”. The “Exchange “ is responsible for matching the buyer and the seller who should both transact in the same exchange. This is because a company can be listed (available for buying/selling) in more than one Exchange. For example, Sony – Japanese company, maker of electronic goods with worldwide presence is listed in the New York Stock Exchange and Tokyo Stock Exchange. So an investor buying Sony stock in Japan will transact with investor selling in Japan, the Tokyo Stock Exchange will match them.
Bond market – Bonds are debt investments. Governments and companies issue bonds to finance their operations. So if you invest in bonds, you are lending your money to them. In exchange you get regular interest payments and you get your money back at a certain time – the “maturity”. Bond market is usually made up of institutional investors (like banks), governments, or a sprinkling of wealthy individuals. These days, if you want to invest in bonds you may do so through an investment bank or join a pool of investors through a “mutual fund or “exchange traded fund” (more details below).
Foreign Exchange (or FOREX) market — Wayyyyyy back in history, when trading of goods and investment went beyond territories, a way to convert “currencies” was devised. After all, buyer and seller have to agree on the value of item being traded, say silk, which could be 30 dollars equivalent to 50 dinar. A currency is used by a country or a group of countries that have agreed to use the same currency. FOREX market is the biggest in the world, averaging $3.98 Trillion daily which makes it very liquid (easy to get in and out of) and attractive to traders. The FOREX market presents opportunities to gain from the increase in value in one currency or to get more return from interest rate payable on your funds when converted to the currency of another country (or both!). It has been said that money will go where it is treated best. Australia’s official cash rate is 4.75%, the highest among the most developed (and least risky) countries, Japan’s interest rate is 0 to 0.10% . Where will your money earn more? You do the math!
Commodities market – where physical, raw or primary products are bought and sold in standardized contracts. Examples are agricultural products like corn, soybeans, cotton, wheat, sugar. Energy products like crude oil, natural gas, heating oil. Precious metals like Gold, Platinum, Silver. Industrial metals like Copper, Steel, Zinc, Aluminum. Economic situation also affect the movement in prices as poor economy would result to lower demand and dampen the prices. In times of crisis some commodities like gold and oil tend to attract investment as they are thought of as “safe haven” or critical asset. Commodities trading involve physical delivery of the product, although thanks to the fertile imagination of finance professionals, Derivative contracts are also now traded.
Derivatives – these are financial contracts that has value “derived” from an underlying asset (such as share , currency or commodity) . The common types are Swaps, Futures and Options. Traders use Derivatives for leverage (e.g. profit from a move in value using small amount of cash ), speculate or take profit if the value of the asset move as expected, hedge or protect from risk especially when they hold the asset, participate in a trading opportunity when not possible physically e.g. Oil – if you don’t own a warehouse you can’t take delivery of barrels of oil. I trade Options on Oil Stocks, apart from the benefits mentioned above, I like the idea that I can earn an income while protecting my stockholdings, effectively lowering my risk and increasing my returns. It’s a bit complicated, but helpful to lower your risk — so it is totally worth the effort. More on this later. 🙂
Funds – investors could put their money together into “funds” — with other investors to invest in assets. A fund manager would usually manage the money. You might have heard of “mutual funds”, “hedge funds”, “pension funds” or “exchange-traded funds (ETFs)”. Also, Sovereign-wealth funds – which are money managed by the government in behalf of their people/ state. Among the above mentioned, ETFs are the only funds traded in the stock exchanges. ETFs provides profit opportunities for an investor where he may not be able to do so alone. For example, buy Gold ETF instead of physical gold – when you don’t have huge sum of money and storage, or Country-specific ETF that can let you profit from strong growth in companies doing business in countries like India, Brazil, Indonesia or South Korea. ETFs are sold in units and are traded like stocks in that it is allowed limit orders, you can short sell (sell first to Open transaction and Close to Buy back order), and carry out Options trades.
Real Estate market – Of course, who can forget real estate? It is just not popular now but people borrow/still put money in it though, after all, we all need somewhere to live or conduct business on. There are many kinds of real estate investment– residential, commercial, rural property, etc. there are also “group investments” like property syndicates, REITs (Real Estate Investment Trust) etc. Rental income from tenants and capital gain from increase in land value are the main reasons to invest in real estate. Do you hear that? Not, “the tiles were a beautiful sky blue” or ornate fireplace or you’d have a chance to pay less tax. (Alarrrrm bells! If you are being cajoled into investing in property harping about the tax benefits, run away! More details later, promise.) Real estate is just not too profitable at the moment because of the Global Financial Crisis, banks used to advertise willingness to lend 100% to buy a house. Now credit is harder to get. Which is a good thing. Some people need to be saved from themselves.
A Super Ocean
This brings me finally, to say I believe all these markets are interconnected and affect their performance, or movement. I mentioned the idea that “money will go where it is treated best”. If you have any doubts about this, just think of Retirement. By then, you won’t / can’t work and income have to come from somewhere. So to provide for the future, early on, money is put to where one can get the best returns. Say at 25 years old, you put your money in a term deposit account paying 6% over 40 years, with compounding (means keep adding the earnings to the original amount), an initial 10,000 investment becomes 102,857 (roughly) – which you are supposed to live on for the rest of your life. Say another 20 years, it’s not enough is it? That’s why you need to keep adding on your retirement fund AND make sure you get the best returns.
And where are the best returns you might ask?
The Information Age have made it so easy to know what happens on other parts of the world. Just before I went to sleep last night, I checked the markets and Europe stockmarket was down due to debt issues with Portugal, there is fear that the government can not pay back their debt (the bonds that investors lent on). I woke up with Gold moving up $4.50 as it is thought of as “safe haven” from weak currency or too much “wild swings” (volatility) of either Euro or US Dollar. The US market which opens following the European market fell 100points at the start of the session, when seemingly, it recovered since there were some upbeat news about US companies, though more companies fell than rose and session still ended lower. Big money could move to invest in growing economies with less debt worries – Indonesia, Thailand, VietNam, or the robustly growing India, Brazil and China. That’s why US companies that get a lot of revenues from these markets also report high earnings which excite the stockmarket. OK before anyone runs out to invest – I am just describing what happens in the markets, the Up / Down moves are not predictable. One time, there was even a very poor Jobs report in the US but the stockmarket even moved up 100points and kept inching up for 2 months or so because it is believed to justify the US government’s spending to stimulate the economy – a case of “bad news is good news”. In May last year, the US market plunged 10,000 points in a matter of minutes, and recovered in a matter of minutes, people offered different explanations, like someone with a fat finger entered wrong trading price and following that, technical sell signals were triggered by computer programs. Eventually, months after and even after government investigation, no one figured it out.
Alright, so these markets move a lot and affect each other. This leads me to share what I’ve learned that the financial markets, is like a vast, complex, dynamic Super Ocean. I spent countless hours trying to know everything I can, with no spectacular result. It turns out you don’t have to. It is what it is. I think women can easily accept this truth, just like… when a man you shared a few good dates with gets cold, … “he’s just not that into you”.
As a trader you don’t need to know everything about the Super Ocean that is the Financial markets, you just need to know how to ride the waves. 🙂