The Financial Market Environment
1. Trading V/s Investment
2. Market Basics
3.Different Types of Market
1. Trading V/s Investing
Both involve seeking profits from the markets, but which side should you be on? The only way you are going to be able to determine that preference is by understanding what the differences are between the two :
Trading : Trading is the action or art of buying and selling the markets for a short term profit gain. It really is an artform. Your decisions are justified by cases being built through technical analysis and a strategy based trading approach.
A trader can make money in upward and downward moving markets. This style of trading is referred to as a contract for difference (CFD). Unlike investing in stocks where you only make money if the underlying shares in your portfolio increase in value, trading the forex market means that you can make buying decisions and make money when the market moves upward or make selling decisions and make money when the market moves downward.
Majority of the time, we use technical analysis because it assists in making quick decisions and picking the perfect timing to enter a setup. Trading relies heavily on volatility to move price over short periods of time. Volatility (or activity) creates liquidity in the markets. The more activity there is in the market then the more aggressively we will see the market move and this is something that would benefit us because you can only make money when the market moves not when its lazing around enjoying a picnic.
Investing : Investing is a different kind of breed all on its own. You really must have an uninterrupted sense of patience to allow for your investment decisions to grow and offer return over the long run. It’s the action of buying a favourable asset for long term gains. This is the most evident and obvious difference between trading and investing, it’s the time period comparison of short term versus long term. An investment decision is based on a projection of future value. When you are investing into an asset of some sorts you must realise that you are planning for the value or price to increase over time (and most of the time indefinitely) to a point where you are satisfied and want to cash in. Sometimes people never cash in on their investments and instead hand them down to children, grandchildren or family.
Fundamental analysis is the analytical method of choice when it comes to investing. Here influences such as news, fiscal policy, company reports and pollical influences to name a few certainly come into play.An investment decision needs long term growth to offer the investor any sort of significant return.
Speculation
The word speculation can be misinterpreted and misunderstood if not put into the right context. All that speculation really means is the forming of a theory with hope for a favourable outcome. When we analyse the markets for the purpose of trading, we are just speculating if price will continue in a direction that will bare profits for us over the short term.
Speculation has been called many different names: Belief, conjecture, opinion, thought, deliberation…. The list goes on. In trading, just understand that speculation is an educated decision one makes to determine a trading decision.
Traders rely on fluctuations! During these events, the trader is aware of risk and must manage his/her exposure strictly. Ladies and gentlemen, I cannot stress this enough that risk management is the cornerstone of participating in the markets. It is the pillar that upholds the potential of longevity for you in the marketplace.
2. Basics of Market
Simply put, price moves on a chart because every day people are buying and selling into the Indian stock market by the Millions. Price action is the term used to describe the movement of price from one point to another (increase or decrease) over a specific period. Prices are simply a consensus of value as set by buyers and sellers based on current conditions. Not everyone is buying and selling to the same extreme, but you’ll be surprized by how many people buy and sell at similar price levels., this generally creates support and resistance levels or key levels.
The playout of price action allows us to analyze the market and make subjective and discretionary decisions accordingly. Price action is going to be your best friend. It’s going to tell you everything you need to know about the ongoing activity over a currency pair or other asset you may be looking at. It’s retail traders and institutional traders that control most of the trading volume in the market. The major institutions control most of the market but retail traders like you and I who are trading for our own well-being certainly sum up to quite a bit all collectively.
On the topic of the stock market you may wonder why the market actually exists and why it is available for investors to take part in? Essentially, it’s to generate cash for the underlying business that has offered its shares. It’s all really because companies need to raise capital – to grow and expand and do research and similar other things. When companies go public for the first time, they release what is called an “IPO” an initial public offering. The public have the choice to buy shares in the company at what is normally quite a cheap rate which creates quite a bit of excitement and a bit of a purchasing rush.
The company makes money by selling a portion of itself to raise capital. A great example would be what Facebook did, back in 2012! They “went public” and they allowed their shares to be traded on the public stock market which is the NASDAQ
3. Different Types of Market
a) Stocks & Indicies :
One of the very interesting market made available to all retail traders to participate In.Stocks are bits and pieces of companies broken up and made available to the general public for purchase. Since Equities are traded on an exchange they have opening and closing times for trading sessions. Shares and equities are designed to raise operating capital for the issuer and Speculators would invest with the hope of gaining a return.
An index is merely a basket of stocks. Some examples include the SENSEX , NIFITY50 ,BANKNIFITY , S&P500 which is a basket of the top large cap companies operating in the India ,US and the FTSE100 which is an index of the top 100 companies on the London stock exchange with the largest market cap.
b) Currencies :
Currency trading is the act of buying and selling international currencies. Very often, banks and financial trading institutions engage in the act of currency trading. Individual investors can also engage in currency trading, attempting to benefit from variations in the exchange rate of the currencies. The currency trading (FOREX) market is the biggest and the fastest growing market in the world economy. Its daily turnover is more than 2.5 trillion dollars, which is 100 times greater than the NASDAQ daily turnover. Every day more than U.S. $3 trillion in currencies change hands in a highly professional interbank market, in which electronic trading platforms link currency traders from banks across the world directly. FX markets are effectively open 24 hours a day thanks to global cooperation among currency traders. At the end of each business day in Asia, traders pass their open currency positions on to their colleagues in Europe, who – at the end of their business day – pass their open positions on to American traders, who just begin their working day and pass positions on to Asia at the end of their business day. And there, the circle begins anew. This makes FX truly global and very liquid.
c) Commodities :
A commodity is a group of assets/goods that are important in everyday life, such as food, energy or metals. A commodity is alternate and exchangeable by nature. It can be categorized as every kind of movable good that can be bought and sold, except for actionable claims and money.
Commodity trading in India started way back in time, even before it did in many other countries. But, foreign invasions and ruling, natural calamities, and countless government policies and their amendments were major reasons for the diminishing of commodity trading. Today, even though there are various other forms of stock market/share market trades, commodity trading has regained its importance.
There are six major commodity trading exchanges in India as listed below.:
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Multi Commodity Exchange – MCX
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National Commodity and Derivatives Exchange – NCDEX
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National Multi Commodity Exchange – NMCE
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Indian Commodity Exchange – ICEX
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Ace Derivatives Exchange – ACE
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The Universal Commodity Exchange – UCX