Introduction to Financial Markets – Let’s look at some of the principle players in financial markets. What are their moves and how do they fit together? We could write much more on each one – but here’s a handy overview.
The market makers
Let’s start with market makers. The clue is in the name. A market maker, usually a bank or a brokerage firm, provides both the buy and the sell price for a commodity (and many other financial securities that are regularly traded). They ‘make’ a market.
A market maker provides a measure of liquidity – that ‘L’ word again – with a ready-prepared bid-and-ask spread. Market makers can buy and sell at any time and will buy your stock, even if they don’t have a buyer lined up. So their role is very much about freeing up the market. It’s a service for now-Introduction to Financial Markets
Most market makers are not about trying to pull a quick profit at your expense. Most want a professional long term relationship with a client.
High frequency traders
As with many things in life, timing is everything. The market makers strategy is to constantly buy and sell – and make, they hope, modest amounts of profit along the way.
High frequency traders (or HFTs) lie and wait in the long grass, waiting for a stock to rise or fall. Then they pounce. Increasingly, algorithmic computer models are deployed to support them.
The smart market pinstripes of the full-service advisor, for example, offer all manner of advice – from retirement to tax planning and investments. But their services aren’t the cheapest.
Which is where execution-only brokers come in. They’re happy to carry out any trading moves on your behalf. As their name implies, they don’t advise, and their fees are generally lower.
An advisory stockbroker is more a halfway house between the two – typically offering a quarterly or bi-annual review of your portfolio. They will also support any of your dealing or trading moves.
What of the role of private retail traders in all this? It’s important to separate those keeping a close eye on daily share price movements – typically day traders – and those investing for substantial time periods, such as the long-term investor.
The longer-term investor may be saving for retirement, school fees or a holiday. However both types of private trader are often heavily invested – it’s just they have very different investment timelines. Both are still key market players.
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Looking for a commodity definition? A commodity is a basic good or primary good that one can group under standard headings before they are then traded. Commodities are mostly used as part of the production of finished goods and services and fall into categories such as oils, minerals and agricultural produce. Each commodity is interchangeable, which is why any attempts to set up a gemstone commodity market have failed since each gemstone is different from the other.
What you need to know about commodities…
There are many different types of commodities, but the basic idea is that each type of the commodity is the same regardless of its producer. For example, a portion of grain from one producer will likely not differ from another portion of grain from another producer.
Types of commodities
Commodities can be soft or hard, with energy forming a subcategory under hard commodities.
The production of these commodities relies a lot on the weather so any unseasonable weather or a strong storm season can have a huge affect on the production of these commodities. As a result, the prices of soft commodities are often unpredictable making soft commodities a volatile type of commodity. If these conditions differ in any way, it can have a detrimental affect on crop production.
Countries where a large amount of hard commodities are produced (Peru, for example, which produces high quantities of gold) rely a lot on exports and as a result currency is often tied to its value – Introduction to Financial Markets
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Energy commodities: these are a subcategory within hard commodities, referring to assets such as oil, coil and natural gas. Since the world has a strong appetite (and arguably a growing appetite) for energy, energy commodities are a popular choice of investment for traders looking to make large profits. The most commonly traded type of energy commodity is crude oil, with over 87 million barrels traded every single day. Uranium, electricity, solar power, ethanol and wind power are other types of energy commodities.
Markets in context
Financial markets operate on the same principle as other markets by bringing together a critical mass of buyers and sellers who wish to trade goods and services. This eliminates the need for bilateral deals where the counter parties would have to spend a lot of time and effort trying to find their opposite match.
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