Trading markets refer to different types of assets with their own unique characteristics. Some of the most common trading markets include stocks, derivatives, commodities, forex, and cryptocurrencies. They all offer distinctive rewards and come with various levels of risk. To be a successful trader, it’s important to understand how each of these markets move, and then become a master of at least one or two.
Stock Market
The stock market allows investors to buy and sell shares of company ownership. If you buy a share and the value of the company increases, the share price goes up and you make a profit. However, if the company’s value declines, you suffer a loss.
Preferred stocks and common stocks are the main types of stocks. A common stock grants you ownership rights in a company, including the ability to vote in company matters and receive dividends (if the company pays them). On the other hand, preferred stocks come without the right to vote or receive dividends.
Derivatives Market
Derivatives allow investors to buy and sell contracts that pull their value from an underlying asset. One of the most common derivatives is options contracts, which give traders the right to buy an underlying asset at a given price at a set date, but there’s no obligation to follow through. If you want to learn more about this potentially lucrative investment type, read this option selling handbook.
Other derivatives include futures and swaps. Futures are agreements to sell or buy an asset at a set price on a “future” date, whereas swap contracts are an agreed exchange of different cash flows.
Commodities Market
The commodities market lets investors buy and sell raw materials and other physical assets. Commodities are split into the following two categories:
- Soft commodities. Includes livestock or products.
- Hard commodities. Natural resources that can be extracted or mined.
The price of commodities is influenced by several different factors including global economic conditions, weather conditions, and supply and demand. There are many motivations for trading in commodities including hedging against risk. For example, a farm worker may buy corn futures to hedge against a current reduction in corn price.
Forex Market
The forex (foreign exchange) market is decentralized and active 24 hours a day Mon-Fri. As one of the largest markets in terms of liquidation, forex has become increasingly popular over the last few years. However, the market moves with high volatility, which means there’s potential for plenty of profit but just as much room for devastating loss.
Cryptocurrency Market
Cryptocurrencies are digital assets stored on blockchains, which makes it a decentralized market that’s highly volatile. Being secured by cryptography, each token is almost impossible to double-spend or duplicate. The most known and most valuable crypto is Bitcoin, but there are thousands of cryptocurrencies existing on many centralized and decentralized exchanges.
Before you start trading, it’s important to understand the different markets and decide which ones to explore further. You don’t need to become an expert in all markets, but you at least need to understand the basics and importance of each one.