Economy
What you Should Know About Different Types of Financial Markets
Financial experts from CMC Markets share their insights into the types of financial markets and offer guidance on choosing where to trade when using derivatives such as spread bets and CFDs.
With the shockwaves of war, the pandemic, and a shifting political landscape rippling across the world, there has never been a more important time for traders to choose their markets wisely. Here, we will take a look at some expert insights on what to consider before trading.
What are the different financial markets?
There are many different types of financial markets that range from currencies to commodities and bonds. Each market then has specific subsets. For example, the commodity market is broken into Energy, Precious Metals, and Agricultural commodities.
What is the foreign exchange market?
Also known as the “forex market”, the foreign exchange market is the world’s largest and most active trading market. It is also the most liquid, which means it is the easiest to convert trades into real cash. While foreign exchange trading has long been dominated by large global banks and institutions, in recent years, it has become increasingly popular and accessible to individual traders.
Trading currencies is slightly different from trading other assets. Trading other assets usually involves trading in one market with profit and loss based on absolute returns (unless you are spread betting). For example, if you buy and the market goes up, you could make money. If you buy and it goes down, you could lose money.
However, foreign exchange trading is done using currency pairs, with one currency being traded against another. Profits and losses are measured by how one currency performs relative to another. For example, on a given day, the US dollar (USD) could appreciate relative to the euro but also decline relative to the Japanese yen. In the foreign exchange market, there are no absolute returns as there may be in other markets.
What is the commodity market?
In the commodity market, there are two main types of traders: hedgers and speculators.
Hedging is a strategy that involves opening multiple buy or sell positions at once to reduce the risk of loss and protect your portfolio from factors that are beyond your control.
A typical example of a hedger is a trader who wants to lock in a price for a product that they will then use at a future date, using futures or forward contracts. For example, farmers and agricultural companies may want to lock in a price for wheat for when they deliver it in September. This means that if the price of wheat falls between when it is sowed and when it is harvested, the hedgers are protected against any significant losses.
Speculators, on the other hand, look to profit from changes in prices as supply and demand conditions change. They have no intention of delivering or taking physical goods and instead try to predict (or speculate) which direction a particular market is headed and then trade from there. Spread betters and CFD traders can be classed as speculative traders, as they bet on the price movements of financial instruments rather than making a direct investment.
Commodities tend to fall into the following groups:
- Precious metals and base metals
- Energy commodities
- Agricultural commodities
What is the treasuries and bond market?
The treasuries and bond market is another active trading market that gives you the opportunity to trade off wider economic trends across different countries.
Governments across the world issue bonds or gilts to individual investors, businesses, banks, and even other countries. A bond can be thought of as a share in the government – you lend them money for government spending and then they repay you with interest at a later date.
Governments sell bonds at different prices and with different rates of interest depending on the economic conditions at the time. Once a bond has been issued, it usually has a fixed rate of interest.
As well as interest payments, government bonds often also pay off with a lottery-style reward system that is drawn every month. Bond investors can receive tax-free cash prizes of up to £1,000,000 if their name is selected from the pool.
What is the stock market?
Stock market trading is what people usually think of when they think of financial markets and investments. The sale of shares from a company’s treasury to shareholders is known as the primary market.
With stock market trading, companies sell shares with the intention of raising further money and capital to expand their business. Traders may buy the shares with the expectation that the value of the company’s shares will rise; however, with derivative trading products such as spread bets and CFDs, you can also open short positions or sell the instrument if you expect the price of the stock to fall, which can lead to equal profits.
What are stock market indices?
Global market indices are the benchmark measure used to evaluate the strength or weakness of a particular region or country’s market performance.
A market index evaluates the performance of the top companies by market capitalisation or share price in a country. This is then used as a barometer for the market performance of a whole country and even to evaluate the impact of wider macroeconomic trends that can be seen in indices across the world.
Different indices are comprised of a different number of companies depending on the country. For example, the FTSE 100 evaluates the performance of the top 100 companies in the UK, whereas the Dow Jones 30 looks at the top 30 companies in the US.
Some of the best-known global market indices include:
- FTSE 100 (UK)
- Dow Jones 30 (US)
- Hang Seng (Hong Kong)
- DAX (Germany)
- CAC 40 (France)
- IBEX 35 (Spain)
- OMXS30 (Sweden)
- FTSE MIB (Italy)
How to choose which markets to trade
Understanding financial markets and deciding which ones to trade is, undeniably, complicated. However, there are a few different factors you should consider that can help to simplify the process, along with risk-management protocols.
For example, most traders begin their journey by trading in a market that they are familiar with before they look to branch out to international markets or assets that they are less familiar with.
Then, once you have started trading in a familiar market, you can try taking small steps into a similar area. For example, you might choose to expand trading from individual shares to stock indices or from resource shares to related commodities.
You should also keep your eye on both wider, macroeconomic trends (such as war or fuel supplies) and smaller shifts that are only taking place in a handful of niche markets. Balancing the small picture with the big picture is a key skill for any budding investor and spotting the relationship between small trends and big trends can lead to very smart trades.
Derivative trading comes with a number of risks, such as volatility within the financial markets and the potential of capital loss, so it is important you also consider how to combat these. For example, traders often place tools such as stop-loss and take-profit orders on positions after considering how much they are willing or able to lose. Even markets that some traders consider relatively safe, such as the bond market, can present opportunities for losses, so it’s important to always be prepared.
By Adedapo Adesanya
Seplat Energy Plc will revive hundreds of Nigerian oil wells laying fallow after completing the acquisition of Mobil Producing Nigeria Unlimited (MPNU) from ExxonMobil.
The company said it aims to lift oil output to about 200,000 barrels a day, a move that will help boost Nigeria’s oil production levels, as it aims to reach 2 million barrels per day next year.
The transaction, according to Seplat, “is transformative for Seplat Energy, more than doubling production and positioning the company to drive growth and profitability, whilst contributing significantly to Nigeria’s future prosperity.”
The completion of the Seplat-ExxonMobil deal has created Nigeria’s leading independent energy company, with the enlarged company having equity in 11 blocks (onshore and shallow water Nigeria); 48 producing oil and gas fields; 5 gas processing facilities; and 3 export terminals.
Recall that the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) in October approved the deal as part of a series of approvals, while it blocked Shell’s asset sale of up to $2.4 billion to the Renaissance consortium.
The acquisition of the entire issued share capital of MPNU adds the following assets to the Seplat Group: 40 per cent operated interest in OML 67, 68, 70 and 104; 40 per cent operated interest in the Qua Iboe export terminal and the Yoho FSO; 51 per cent operated interest in the Bonny River Terminal (‘BRT’) NGL recovery plant; 9.6 per cent participating interest in the Aneman-Kpono field; and approximately 1,000 staff and 500 contractors will transition to the Seplat Group.
MPNU adds substantial reserves and production to Seplat Energy; 409 million barrels of oil equivalent (MMboe) 2P reserves and 670 MMboe 2P + 2C reserves and resources as at 30 June 2024 and 6M 2024 average daily production of 71.4 kboepd (thousand barrels of oil equivalent).
Business Post reports that Seplat will be part of the payment this year, and will defer some to next year,
Speaking on the transaction, the Chairman of Seplat Energy, Mr Udoma Udo Udoma commended President Bola Tinubu for supporting this transaction and appreciated the support and diligence of the various ministries and regulators for all the work to reach a successful conclusion.
“We are delighted to welcome the MPNU employees to Seplat Energy. We are excited to begin our journey in a new region of the country, and we look forward to replicating the positive impacts we have achieved within our communities in our current areas of operations.
“Seplat’s mission is to deliver value to all our stakeholders, and we treasure the good relationships we have developed with the government, regulators, communities and our staff.”
On his part, the chief executive of Seplat Energy, Mr Roger Brown, described the acquisition as a major milestone, adding, “I extend my thanks to the entire Seplat team for their hard work and perseverance to complete this transaction.
“MPNU’s employees and contractors have a strong reputation for safety and operational excellence, and I welcome them to the Seplat Energy Group.
“We have acquired a company with one of the best portfolios of assets and related infrastructure in a world-class basin, providing enormous potential for the Seplat Group. Our commitment is to invest to increase oil and gas production while reducing costs and emissions, maximising value for all our stakeholders.
“MPNU is a perfect fit with our strategy to build a sustainable business that can deliver affordable, accessible and reliable energy for Nigeria alongside attractive returns to our shareholders”.
By Adedapo Adesanya
The National Pension Commission (PenCom) is projected to close the year with over N22 trillion in pension assets impacted by challenges like inflation and monetary policies.
This is according to PenCom Director-General, Mrs Omolola Oloworaran, at a press conference in Abuja on Thursday.
She said as of October 2024, the Contributory Pension Scheme (CPS) had 10.53 million registered contributors and pension fund assets worth N21.92 trillion.
Speaking at the conference-themed Tech-driven Transformation Shaping the Pension Landscape, which showcased PenCom’s strategic commitment to innovation, she said that the numbers reflected the agency’s unwavering commitment to fund safety, prudent management, and sustainable growth.
She explained that the pension environment was impacted by the wider economic challenges facing the country, noting that the sector battled multi-year high inflation, Naira devaluation, and the lingering effects of unorthodox monetary policies by the Central Bank of Nigeria (CBN).
Business Post reports that the apex bank hiked interest rates by 875 basis points this year alone to tackle persistent inflation which peaked at 33.8 per cent as of October.
She said that these challenges eroded the real value of pension funds and impacted contributors’ purchasing power.
“To address these issues, the commission has initiated a comprehensive review of its investment regulations.
“It is focusing on diversifying pension fund investments into inflation-protected instruments, alternative assets, and foreign currency-denominated investments.
“The goal is to safeguard contributor savings and ensure resilience against future economic volatility,” she said.
She restated the commission’s commitment to expanding pension coverage, particularly through the advanced micro-pension plan designed to encourage participation from the informal sector using technology.
“This initiative will make it easier for everyday Nigerians to save for retirement, aligning with our vision of inclusive growth and financial stability for all.
“The backlog in retirement benefits for retirees of the Federal Government’s Ministries, Departments, and Agencies (MDAs) will soon be settled.
“The federal government recently disbursed N44 billion under the 2024 budget to settle approved pension rights.
“We are collaborating with the Federal Government to institutionalise a sustainable solution to ensure retirees receive their benefits promptly, eliminating delays,” Mrs Oloworaran said.
She said that PenCom’s technology-driven transformation aimed to make the CPS more accessible, reliable, and sustainable.
“From data management to seamless contributions and regulatory supervision, we are paving the way for a future where the pension industry serves all Nigerians effectively,” she said,
Mrs Oloworaran also said that the e-application portal for pension clearance certificates has replaced the manual processes and enhanced the ease of doing business in the sector.
“Since its deployment, 38,528 pension clearance certificates have been issued. This initiative ensures compliance and secures the future of Nigerians working in organisations that interact with the government,” she said.
By Adedapo Adesanya
The NASD Over-the-Counter (OTC) Securities Exchange closed flat on Thursday, December 12 after it ended the trading session with no single price gainer or loser.
As a result, the market capitalisation remained unchanged at N1.055 trillion as the NASD Unlisted Security Index (NSI) followed the same route, remaining at 3,012.50 points like the previous trading session.
However, the activity chart witnessed changes as the volume of securities traded at the bourse went down by 92.5 per cent to 447,905 units from the 5.9 million units transacted a day earlier.
In the same vein, the value of securities bought and sold by investors declined by 86.6 per cent to N3.02 million from the N22.5 million recorded in the preceding trading day.
But the number of deals carried out during the session remained unchanged at 21 deals, according to data obtained by Business Post.
When trading activities ended for the day, Geo-Fluids Plc remained the most active stock by volume (year-to-date) with 1.7 billion units sold for N3.9 billion, Okitipupa Plc came next with 752.2 million units valued at N7.8 billion, and Afriland Properties Plc was in third place with 297.5 million units worth N5.3 million.
Also, Aradel Holdings Plc remained the most active stock by value (year-to-date) with 108.7 million units worth N89.2 billion, followed by Okitipupa Plc with 752.2 million units valued at N7.8 billion, and Afriland Properties Plc with 297.5 million units sold for N5.3 billion.
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