Introduction to Financial Markets
Lesson 2 of 11
Why trade the financial markets?
People participate in financial markets for many reasons, including investment, speculation, diversification and risk management.
One of the most common reasons is the potential to grow capital over time.
Money held entirely as cash does not necessarily maintain the same purchasing power indefinitely. Inflation can increase the cost of goods and services, meaning the same amount of money may purchase less in the future.
Financial assets, on the other hand, can rise in value.
However, they can also fall.
This balance between potential return and potential loss is central to financial markets.
Investing vs trading
Although the terms are sometimes used interchangeably, investing and trading generally have different time horizons.
Investing
Investors usually focus on longer-term changes in value.
An investor might purchase shares in a company and hold them for several years because they believe the business will grow.
Investors often study factors such as:
Company growth
Earnings
Economic conditions
Industry trends
Long-term valuations
Trading
Active traders generally focus on shorter-term price movements.
Depending on their strategy, a trader may hold a position for:
Minutes
Hours
Days
Weeks
Several months
Some traders analyse charts and price patterns, while others concentrate on economic data, company announcements, interest rates or geopolitical developments.
Many combine several forms of analysis.
Why are there different trading styles?
Not every trader approaches the market in the same way.
A person who can monitor markets throughout the day may prefer shorter-term trading.
Someone with less time may instead analyse longer-term trends and hold positions for days or weeks.
Trading style can depend on:
Available time
Risk tolerance
Market knowledge
Trading objectives
Strategy
Preferred financial markets
There is no single approach that works for everyone, and no strategy eliminates the possibility of loss.
Lesson summary
Financial markets offer opportunities for investment and trading.
Potential returns always involve risk.
Investing generally focuses on longer-term value.
Trading generally focuses on shorter-term price movements.
Different traders use different strategies and time horizons.