Introduction to Financial Markets
Lesson 1 of 11
What is financial trading?
Financial trading is the buying and selling of financial instruments with the aim of participating in movements in their prices.
Financial instruments can represent many different markets, including:
Shares — ownership interests in publicly listed companies
Stock indices — measurements tracking groups of shares
Forex — currencies traded against one another
Commodities — markets such as gold, silver, oil and agricultural products
People participate in financial markets for different reasons.
A business may exchange currencies because it needs to pay an overseas supplier. An airline might manage exposure to changing fuel prices. An investor may buy shares because they expect a company to grow over time.
Traders, meanwhile, are often primarily interested in changes in market prices.
If a trader believes an instrument will rise in value, they may look for an opportunity that benefits from an upward movement.
If they expect the price to fall, certain financial products can also allow them to take a position based on a downward movement.
How does financial trading work?
Every trade involves two sides: a buyer and a seller.
The price at which they are prepared to transact is influenced by supply, demand and expectations about what might happen next.
Imagine a market trading at 100.
A trader believes new economic information could increase demand and push the market higher. The trader enters a position based on that expectation.
If the price rises to 105, the movement has gone in the expected direction.
If it falls to 95, it has moved against the trader.
This illustrates one of the most important principles of trading:
Potential returns and risk always exist together.
Predicting market direction correctly can create opportunities, but incorrect predictions can result in losses.
What are financial markets?
Financial markets are systems where buyers and sellers exchange financial instruments.
Some operate through organised exchanges, while others operate electronically through networks of banks, brokers, institutions and other market participants.
Examples include:
Stock exchanges
Foreign exchange markets
Commodity markets
Futures markets
Modern financial markets are largely electronic, allowing participants around the world to interact with prices and place transactions rapidly.
Lesson summary
Financial trading involves buying and selling financial instruments.
Major markets include shares, indices, forex and commodities.
Traders attempt to benefit from changes in market prices.
Financial markets connect buyers and sellers.
Every trading opportunity also involves risk.