Published on Oct 6, 2022

Markets : What are they and what do they trade in? - Commodities, Bonds, Stocks and Currencies

Have you been intrigued by various terminologies related to Finance Market? What is a Market? What happens at a market? What do people trade etc etc? if yes, then this article will help you make sense of this huge ocean.

The 'Market' is a huge and overwhelming place for an investor when he/she sees multiple indexes, exchanges, stock categories etc. To understand it better we need to first learn about various markets and their relations in the finance world. Step by step, let us understand some basic terminologies .

Commodity : a commodity is a basic good used in commerce that is interchangeable with other goods of the same type. It is usually referred to as raw material used to make the finished product.

Bond : a bond is loan from an investor to a borrower such as a company or government. The borrower uses the money to fund its operations, and the investor receives fixed interest on the investment.

Stocks : a form of security which represents a share in the ownership of the issuing company. Companies sell stocks to people to receive the money they need to grow. Investors buy stocks as a way of investment (ways of possibly earning money as the company will grow over a period of time).

Currencies : is a medium of exchange for goods and services. Money, as we commonly call it, is issued by the government in form of paper or coins considered at its face value as a method os payment.

Now that we are clear about these terminologies, let us understand how each market works.

Commodity Market : Commodities include crude oil, natural gas, and gasoline. Precious metals include gold, silver, and platinum. Agricultural products include wheat, corn, soybeans, and livestock. Other commodities you can trade are coffee, sugar, cotton and frozen orange juice. There are two types of Commodities Market 1. Spot Market and 2. Derivative Market. For Spot market buyers and sellers exchange cash for the raw commodity they wish to trade. While for Derivatives market, buyers and sellers exchange cash for the right to 'future' delivery of the product. There are three types in this category viz. Forwards, Futures and Options.

Bond market : Bonds are a type of fixed-income investment. Bond Markets work on basic principal of returning the money borrowed back to the lender in a pre-decided time frame along with a pre-decided interest rate during the tenure, irrespective of the volatility of the market. If the investors hold onto their bond till maturity, they receive their principle money back. There are many bonds which are tax-free and adding bonds in your portfolio helps to diversify it as the risk involved is similar to FD but the returns are potentially more.

Stock Market : This market works on demand and supply mechanism. If lot of people wish to buy shares of a particular company the stock prices rise. A vast majority of stock trading takes place between investors. If you wish to buy shares of a particular XYZ company from your brokers site, these are what the other investor (not from XYZ company) has chosen to sell. Now by purchasing these shares you become an investor in that XYZ company.

Currency Market : Also known as Forex Market, it is the largest financial market in the world even larger than stock market. It involves exchanging one national currency against another based on an 'exchange rate'. Exchange rate is the price paid for one currency in exchange of another. There are 180 different types of currencies in the world. However most of the payments and forex trades happen in US Dollars, British Pounds, Japanese Yen, Euro, Australian Dollar, Swiss Franc, Canadian Dollar. Types of trading in this market are : 1. Spot transactions, Forwards, Swaps and Option contracts. Trading in this market is on continuously around the world 24/7 for 5 days a week. Market participants use this market to strategise and minimise risk against international currency changes and interest rate risk, by speculating over geo-political events and diversify their portfolios. Global corporations use this market to protect currency risk from foreign transactions.

Wrapping up : Understanding various markets and how they function allows one to choose which market will work best for you based on interest, investing capacity, tolerance to losses and stamina to stay alert about the happenings in the world. Gain knowledge about it and make the right choice. There are also Demo trading options provided by various brokers before you venture into Live-trading. Check out other blogs from ForexOverflow to gain knowledge about other finance terminologies.

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