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.
NGX Rises 0.02% as Interim Dividend Hunters Return
By Dipo Olowookere
The return of interim dividend hunters to the market further pushed the Nigerian Exchange (NGX) Limited higher by 0.02 per cent at the close of transactions on Friday.
It was the first trading session of the new month of July 2022 and investors are expecting half-year results of companies on the exchange, especially those in the banking space, the tier-1 specifically, which usually declare interim dividends.
Business Post observed that there were buying interests in Access Holdings and Zenith Bank, though GTCO and UBA came under selling pressure, which depleted their share prices.
But when the market closed for the session, the All-Share Index (ASI) was higher by 12.08 points as it ended at 51,829.67 points compared with the previous day’s 51,817.59 points.
In the same vein, the total value of equities on the platform increased by N7 billion to N27.942 trillion from the N27.935 trillion it closed a day earlier.
The investor sentiment remained positive as there were 16 depreciating stocks and 20 appreciating stocks led by The Initiates, which rose by 10.00 per cent to 44 Kobo. Cutix expanded by 9.78 per cent to N2.47, Linkage Assurance moved higher by 9.62 per cent to 57 Kobo, John Holt grew by 9.33 per cent to 82 Kobo, while Caverton chalked up 8.82 per cent to sell for N1.11.
On the flip side, Courteville lost 7.84 per cent to trade at 47 Kobo, NAHCO fell by 5.88 per cent to N8.00, Cadbury Nigeria went down by 5.51 per cent to N16.30, Neimeth declined by 3.87 per cent to N1.49, while UPDC went down by 3.74 per cent to N1.03.
The market was relatively quiet yesterday as investors only transacted 127.0 million shares worth N1.7 billion in 3,718 deals as against the 223.1 million shares worth N3.9 billion transacted in 4,213 deals on Thursday, indicating a decline in the trading volume, value and number of deals by 43.06 per cent, 55.93 per cent and 11.75 per cent respectively.
GTCO was the busiest stock as it traded 23.5 million units valued at N480.3 million, UBA sold 22.2 million units for N165.6 million, Sterling Bank exchanged 7.4 million units worth N11.1 million, Oando transacted 7.3 million units worth N40.1 million, while FBN Holdings traded 6.0 million units valued at N67.5 million.
During the session, the insurance space grew by 1.23 per cent, the banking ecosystem expanded by 0.36 per cent, the industrial goods sector appreciated by 0.04 per cent, while the energy and the consumer goods counters depreciated by 0.39 per cent and 0.01 per cent.
Supply Disruptions from Libya, Norway Lift Oil by 2%
By Adedapo Adesanya
Supply disruptions from Libya and Norway pushed the prices of crude oil higher by about 2 per cent on Friday, with the Brent rising by $2.71 or 2.5 per cent to $111.74 a barrel and the United States West Texas Intermediate growing by $2.81 or 2.7 per cent to $108.57 a barrel.
Libya’s National Oil Corporation (NOC) declared force majeure on crude exports from its oil terminals amid continued blockades of production and ports, which have severely crippled the country’s exports.
The force majeure comes after weeks of protests and closures amid the new rift in Libya’s political class over who should be governing the country.
Earlier in the week, NOC said it was considering declaring force majeure within 72 hours unless production and shipment of oil resume in the Gulf of Sirte, which hosts the oil export terminals of Zueitina, Brega, Ras Lanuf, and Es Sider.
The state oil body said that production has seen a sharp decline, with daily exports ranging between 365,000 and 409,000 barrels per day, a decrease of 865,000 barrels per day compared with production in normal circumstances.
In Norway, a planned strike among oil and gas workers on July 5 could cut the country’s overall petroleum output by around 8 per cent or around 320,000 barrels of oil equivalent per day unless a last-minute agreement is found over wage demands.
Also, low crude and fuel supplies supported the oil market even as the US Dollar, which typically has an inverse relationship with crude, rose.
Meanwhile, Ecuador’s government and indigenous groups’ leaders have reached an agreement to end more than two weeks of protests which had led to the shut-in of more than half of the country’s pre-crisis 500,000 barrels per day oil output.
On Thursday, the Organisation of the Petroleum Exporting Countries and allies (OPEC+) agreed to stick to its output strategy after two days of meetings. However, the producer club avoided discussing policy from September onwards.
Previously, OPEC+ decided to increase output each month by 648,000 barrels per day in July and August, up from a previous plan to add 432,000 barrels per day every month.
The Importance of Financing a Sustainable Future
By Sunil Kaushal
While climate change may have taken a back seat in a news cycle dominated by COVID-19, war and the cost-of-living crisis, the risks and threats associated with our warming planet remain the biggest long-term threat to our combined economic future.
Banks and financial institutions will be critical to managing that risk this includes financing of sustainable infrastructure, supporting transition and investing in green innovation. In fact, the banking industry has a responsibility to bridge top-down and bottom-up approaches to net-zero and help the public and private sectors realise the vast opportunities the energy transition and the move to sustainable infrastructure promises.
We can do that by providing capital to finance the investment in renewables, climate adaptation technologies and the transition to a ‘circular economy’ which encourages sustainable use of resources.
According to EY, financial institutions recognise that the transition to net zero will involve more than investments and underwriting for “green” assets and businesses such as renewables and electric vehicles. To achieve net zero across the whole economy, legacy carbon-intensive assets and companies will require financing to help them transition to a cleaner future.
For businesses, this means a fundamental change to operations, and that, in turn, requires capital. Insurers, lenders and investors will play a crucial role in making that capital available and in incentivising and supporting their clients and investees as they make their transitions.1
While stimulating growth through investment in roads, buildings and power supplies isn’t a new strategy, now it offers an opportunity to redefine the traditional playbook and focus on investing and financing sustainability for the longer term.
Creating sustainable and climate-friendly infrastructure will, however, require finance that is fit for the future. There is a growing concern, for example, around stranded asset risk – particularly for long-term investments such as infrastructure. Infrastructure projects need to consider risks 10 years and beyond into the future, many of which may not be immediately apparent. These risks include rising sea levels, increasing temperatures, drought, and coastal erosion. There are also financial and economic risks associated with making investments outside an ESG framework, this includes changes to regulatory settings that may disadvantage or penalise these investments.
Projects that are climate adapted from the outset reduce some of these risks and are more likely to stand the test of time, so banks will need to take into account the potential climate risks over the lifespan of the project to ensure resilience and protect investments.
Sustainable infrastructure projects, however, are traditionally more difficult to make bankable. With a bit of thinking, though, there are usually profitable solutions. For example, in a renewable energy plant, you have clear cash flows linked to the price of generated energy or for an energy efficiency improvement project, you have energy savings which can be translated into cost savings, and they can repay the financing.
At Standard Chartered, we are committed to playing our part in supporting sustainable projects in the region. We take a firm stand in accelerating to net zero by helping emerging markets in our footprint reduce carbon emissions as fast as possible and without slowing development, putting the world on a sustainable path to net zero by 2050.
Sustainability has long been a core part of our strategy, and we have committed USD40 billion of project financing services for sustainable infrastructure and USD35 billion of services to renewables and clean-tech projects by the end of 2024. We have also committed to catalysing $300 billion in sustainable investments by 2030. The projects we finance will trade and growth and contribute to a better quality of life through sustainable development.
The need for action from finance providers is to not only decarbonise their own balance sheets but also to help businesses in the real economy move towards a sustainable future. A successful net-zero transition must be just, leaving no nation, region or community behind and, despite the hurdles, action needs to be swift. To meet the 2050 goal, we must act now, and we must act together: companies, consumers, governments, regulators and the finance industry must collaborate to develop sustainable solutions, technologies and infrastructure.
Sunil Kaushal is the CEO of Standard Chartered Africa and Middle East (AME)
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