Financial markets: a comprehensive overview
What are financial markets?
Just like eBay connects sellers of goods to buyers, financial markets connect sellers and buyers of financial assets. The financial assets being bought and sold could be stocks, bonds, forex, commodities and more, and can be trading using derivatives like CFDs.
Financial markets play a crucial role in the global economy, as they facilitate the flow of capital. They enable individuals and organisations to invest and businesses to raise money and governments to fund their projects. With this, they smoothen the allocation of resources, promoting liquidity and economic growth.
Key participants in financial markets
There are several types of participants in the financial markets.
Exchanges
These are marketplaces where stocks, commodities, derivatives and other financial instruments are traded.
Institutional investors vs retail investors
Institutional investors are large organisations such as pension funds, mutual funds, and insurance companies that invest on behalf of their clients. Retail investors are individuals who buy and sell financial assets for their own accounts.
Central banks and financial regulators
Central banks buy financial assets, like gold and USD, to hold as reserves. They may buy and sell other financial assets to influence interest rates and money supply in their economy. Financial regulators, such as the Securities and Exchange Commission (SEC) in the US and the Financial Conduct Authority (FCA) in the UK, oversee market activities to ensure fairness, transparency and stability.
Market makers and liquidity providers
Market makers or liquidity providers keep financial markets active by continuously offering both bid (buy) and ask (sell) prices for different assets. They ensure sufficient volumes are being exchanged, which keeps markets more efficient. They could be financial firms, investment banks or proprietary trading firms.
The role of financial integration in financial markets
Financial integration refers to the connectedness of different financial markets. A network of banks, brokers and institutional investors connect different national markets, allowing for easier cross-border investments and capital movement.
Better financial integration means fewer barriers to capital flow, which means increased liquidity. Higher liquidity makes investing and trading more efficient for you, as it helps reduce slippage and tighten spreads.
Integrated markets tend to be more volatile, as events in one market impact sentiment in others. Higher volatility offers more attractive trading opportunities.
Financial integration can foster economic growth by improving resource allocation, lowering the cost of capital, and promoting competition within financial sectors.
Types of financial markets
There are many asset classes that you can trade or invest in.
Stock market: also called equity market. It’s where shares of publicly listed companies are bought and sold. Long-term investors aim to benefit from a share price rise as well as dividends. CFD trading allows you to trade expensive stocks at a fraction of their share price.
Bond market: deals with debt securities issued by governments and corporations. Entities borrow money by issuing bonds and investors earn from interest payments.
Forex market: where currencies are bought and sold. This is the world’s largest financial market and plays a very important role in international trade and foreign investment. The price of currencies is always mentioned in pairs, like EUR/USD and GBP/JPY.
Commodity market: where raw materials like oil, gold, silver, and agricultural products are traded. These markets play a significant role in determining the prices of essential goods.
Cryptocurrency market: involves the buying and selling of new-age digital currencies, like bitcoin and ether, which are not issued by central banks.
Derivatives market: facilitates the exchange of CFDs, futures, options, and swaps. Derivatives are financial instruments whose value is derived from an underlying asset but does not require the buyer or seller to exchange the asset.
Money markets: focus on short-term borrowing and lending, typically for periods less than a year. They provide liquidity for banks and other financial institutions.
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Financial market integration and trading indices
Integrated financial markets significantly influence trading indices, which are benchmarks representing the performance of a specific market or sector. Among those trading stock indices, some of the popular ones are US 500 (S&P 500), UK 100 (FTSE 100), and Japan 225 (Nikkei 225).
The financial markets being integrated makes it very important for you to stay abreast of global news and movements in other markets. For instance, a rally in US stock indices may improve sentiment for Asian stocks during the next trading day. News of conflict, trade tensions or geopolitical unrest in major economies can trigger price movements in financial markets across the world.
What time do financial markets open?
Financial markets operate across different time zones, leading to staggered opening and closing times globally.
The Asian markets are the first to open. When they close, European markets open, followed by the US markets. This creates an almost continuous trading cycle for some assets.
|
Stock exchange |
Trading hours (GMT) |
|
Japan Exchange Group |
12am - 6am |
|
China Stock Exchanges |
1.30am - 7am |
|
Hong Kong Stock Exchange |
1.30am - 8am |
|
Euronext |
8am - 4.30pm |
|
London Stock Exchange |
8am - 4.30pm |
|
US stock exchanges |
2.30pm - 9pm |
It is important to know what time the stock market opens. This could be a volatile time as traders respond to the events taking place after the previous session closed. This could be economic data releases or some sudden event, like a tragedy, natural disaster, or war.
|
Forex market |
Trading Session (GMT) |
|
Sydney |
10pm -7am |
|
Tokyo |
12am - 9am |
|
London |
8am - 5pm |
|
New York |
1pm - 10pm |
The overlap between the London and New York sessions often has the most liquid and active period for trading.
Exploring trading accounts and demo accounts
Do financial markets sound exciting? Before jumping into it, open a demo account to explore different assets and learn what impacts their prices. Demo accounts provide a simulated trading environment with virtual money. This means you can familiarise yourself with the trading platform, understand market dynamics, and practise trading strategies without risking real capital.
Open a demo account with Capital.com to explore different financial assets and trading opportunities without any risk.