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Forex Market

The Functions of the Financial Market

The role of the financial market in a modern civilized society is enormous. Its aim is to mobilize capital, distribute it among industries, control and maintain the reproduction process and improve the efficiency of the overall economic system.

The main functions of the financial market, performed by its participants, are as follows:

  • Facilitate efficient relationships between all market participants, from individuals and individual investors to large institutional investors.
  • To supervise and regulate the processes carried out in the financial system: regulation of the money supply, control of compliance with the rules established by market participants, licensing, development of legal provisions.
  • Mobilize and allocate capital to be used more efficiently and generate added value.
  • Minimise risks, including fraud prevention (combating money laundering). Ensure transparent prices and avoid price manipulation.
  • Provide liquidity to the market.
  • Guarantee the privacy and transparency of transactions made.
  • Provide necessary information.

Financial market activities are based on the liabilities of national banks to control exchange rates and to set interest rates. Foreign exchange markets and stocks, as well as commercial banks, are directly related to the development of the financial asset market. The stock market is the most interesting segment of the financial market in terms of return on investment.

Financial Market Participants

Each investor is a participant in the financial market in some way. Each of us works somewhere, making our own contribution to the GDP rate, buying something, which indirectly affects inflation and the level of consumer prices. Someone becomes an investor, buys a foreign currency or collectible currencies, or invests in bank deposits, investment companies, using loans.

But still, economic science classifies financial market participants according to their segment. This means that the financial market, simplifying a lot, is a relationship between two categories of participants: buyers and sellers The third category includes intermediaries who are directly involved in transactions, providing assistance, facilitation, and guarantees. The same financial market actor can act simultaneously as the seller, the buyer, and the intermediary.

Foreign Exchange Market

Sellers – The main sellers are the state and the banks. The country that sells a currency does so through authorized agencies and then performs a regulatory function. Sellers may also be companies engaged in foreign economic activity (sale of profits in foreign currency) and individuals.

Buyers – All agents, even sellers, can interact as buyers.

Intermediaries – This category may include commercial banks, bureaux de change, etc.

The Credit Market

Borrowers – They work internationally, borrowers are States, and the ratio of GDP to external debt is considered one of the best statistical indicators of the state of a country’s economy. At the national level, borrowers are businesses and individuals, local governments, etc. A clear example of a multilevel credit market structure is the US mortgage system, where banks issued mortgage securities to accumulate new capital for later loans.

Lenders – These market participants have reserve capital and want to increase it: individuals, investing their funds in deposits that will then be used for loans, buyers of debt securities (insurance, pensions, investment funds). Certainly, any investor can be called a lender, since it gives extra money with the aim of obtaining a percentage that is destined for development. The state can also be called a lender, which creates liquidity and distributes the money to borrowers through the central bank.

Middlemen – They are all involved in the organization of the distribution of money: banks, brokers, concessionaires, investment management companies. Insurance and pension funds can also be attributed to intermediaries, accumulating and distributing capital.

The credit market is closely related to stock and investment markets. For example, corporate bonds are a tool to raise money and security at the same time. Government bonds are one of the favorite investment options with the lowest risk for investment funds.

The Insurance Market

Insurers – These are companies, duly authorized to provide insurance services. There are open-ended insurance companies (they provide services to all market participants), captive insurers (they are owned and controlled by their policyholders), and risk reinsurance companies.

Insured – Individuals, companies, institutions, who purchase insurance services to minimize risks.

Intermediaries – There are no intermediaries, the transactions are made directly between the insurer and the insured.

All markets are closely intertwined. As mentioned above, insurance companies also participate in the investment market. It also includes insurance instruments (for example, several swaps) used by securities market agents.

Investment Market

Every person who invests his capital in a particular asset is an investor. Intermediaries can be banks, stock exchanges, different types of funds, etc.

The Securities Market

Emitters – These include organizations and companies that issue certain securities: shares, bonds, etc. When issuing, issuers agree that they must comply with all specified (agreed) requirements at the time of issuance.

Investors – They are all those who buy securities to generate income. There are strategies (buying a majority stake) and minority (making up a portfolio, buying securities in order to generate revenue only).

Middlemen – Stock exchanges, banks, insurers, rating agencies, auditors, and other participants involved in the organisation of the issue and placement of securities.

The classification described above can be grouped as follows:

The state and central banks (regulatory and supervisory organisations). Managing the largest amount of capital, these agents mainly perform the supervisory and regulatory function.

Regulators (regulatory and supervisory institutions). Establishments that do not participate directly in transactions (that is why they cannot be referred to intermediaries), but perform a control function. The oversight function is also carried out by the central bank and the state government, but it can also be a separate institution, such as a self-regulatory organization (SRO).

Financial services companies (organisations providing services to the financial market and financial intermediaries). We are talking about institutions that are often involved in organisational work: currency exchanges, stocks and raw materials, brokers, insurers, auditors, depositors, registrars, compensation companies, and consulting.

Banks (financial intermediaries). They are intermediaries involved in the distribution of capital, market regulation, and supervision of compliance with established rules.

Legal entities (lenders, investors, borrowers). The largest group of participants: companies dedicated to the placement of clients’ pension savings, investment, insurance, hedge funds, trust management companies, brokers, concessionaires, individual loan organizations, companies involved in any type of financial activity, participating in the return of money.

Natural persons (lenders, borrowers, investors): traders, speculators, individual asset managers, long-term investors, and ordinary persons, as mentioned at the beginning.

Important Financial Market Indicators

As a general rule, experienced traders actively use the economic calendar, which is provided free of charge by the broker. I recommend making this a habit if you haven’t already. Here is a short summary of some of the most important indicators in the economic calendar and tips on how to analyze them:

Interest rate – One of the main economic tools that allow managing the volume of money supply, thus also adjusting inflation. The interest rate grants loans to commercial banks. A higher interest rate increases interest rates on loans and deposits and therefore encourages consumers to invest. This, in turn, reduces the inflation rate. Influence, when the interest rate is raised, is exclusively dependent on the economy of a given country. For developed countries (e.g., the US), a higher interest rate increases the exchange rate of the national currency. In the least developed countries, raising the interest rate can be seen as an attempt to curb stagnation and thus increase investor interest.

Non-agricultural payroll (Non-Farm Payrolls) – Report on changes in the number of jobs in the US non-agricultural sector. It is considered one of the most important reports, but its impact on the dollar price lasts a relatively short time (few hours). Goes public on the first Friday of every month at 12.30 (13.30) GMT. The statistics are based on data from more than 400 households and are published by the US Department of Labor. In theory, the factor that influences the rate of the US dollar will be the deviation of the fact of the forecast by more than 40 thousand. In practice, much depends on accompanying statistics and investor sentiment.

Consumer price index – It is calculated for a specific group of goods and services that are part of the consumption basket of the average resident of the country. The index analysis for the current year is carried out in comparison with the base (baseline). The IMF, EBRD, and the United Nations recommend the statistical basis for the calculation, but there is no single approach, each country has its own calculation peculiarities. The calculation methodology can be based on the price indices of Lowe, Paasche, and Laspeyres. If the index decreases, it means that consumer purchasing power (real demand) also decreases and may partially suggest a higher rate of inflation growth.

With regard to indicators such as GDP, inflation rate, unemployment, I think everything is clear: the better the indicator, the more positive is the feeling of investors in the currency and stock markets.

Important point: the economic calendar is only a complementary information tool and in no way can it serve as the main tool to base trading strategies. At the time of news release, the market is especially volatile, therefore, the calendar is often used upside down to exit trading.

If you are still willing to try to negotiate with the economic calendar, here are some tips:

Compare the actual value with the forecast. If, for example, GDP growth was 2%, given a forecast of 2.5%, it will have a negative influence on the market. Please note that the data can be reviewed.

Evaluate the chances of an event and the expectations of investors. Let’s take an example, if what is anticipated is that the Federal Reserve increase the rate of federal funding at the next meeting, investors will consider it beforehand and will not undergo major changes at the time of the news release.

Compare the importance of news with other factors. For example, if in times of silence, the publication of statistics on US oil reserves has a significant impact on quotes, then during the peak of the US-China trade war, these data were hardly noticed.

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Forex Market

Structure of the Global Financial Market

What is the global financial market and what comprises its structure? Who participates in the financial market, what is its interaction, and how does the system function? Economic indicators of financial markets are key information for Forex traders, so let’s take a look at the actual structure of the global market as a whole.

Why is theory necessary? The term “financial market” cannot be called as one that the novice trader should first become familiar with, but nevertheless, it is necessary to understand the structure of the financial market. Understanding how the financial market works and how its participants interact with each other can lead traders to new investment opportunities, help optimize costs, and minimize risks. If one is not knowledgeable of the theory, it is not possible to become a practical professional trader. Spend 5 minutes reading this article. We hope it comes in handy!

Structure of the Global Financial Market

When you read about financial markets, do you know what you’re really dealing with? Banks, insurance funds, pension funds; the list of structures that make up the financial market is long enough. From this article, you will learn:

  • What types of financial markets exist.
  • Who participates in financial markets and how they interact with each other.
  • Which assets are subject to an interaction between market participants.
  • What functions financial markets play.

While approaches to determining the structure of the financial market and the role of each participant are different, this article will help you get an overview.

Fundamental Basis for the Trader or Everything in Due Time

If someone tells you to understand the term “financial market”, its structure and functions are essential for each trader, don’t believe it. That’s not the case. However, we can’t say that this information is unnecessary. At first, we didn’t study from A to Z on Forex. We strive to acquire the necessary skills independently. Only when we accumulate some experience by trial and error do we resort to knowledge.

It can be a webinar, a negotiation course, educational articles, or A to Z books on Forex. Depending on the level of our experience, we choose this or that type of information. If a beginner trader takes advantage of reading about 2 types of financial market analysis, fundamental and technical, a more experienced trader might be interested in learning more about the basics of trading, that great thing that is the currency market, your workplace. As they say, all in good time.

Structure of the Financial Market

All national and international markets make up the financial market. It incorporates banks, funds (pension, insurance, currency), and many other economic institutions that help accumulate and redistribute money.

As a complex system, the financial market has a multilevel structure that includes 5 market segments: foreign exchange market, credit market, insurance market, investment market, and securities market. As you can imagine, the Forex currency market represents one-fifth of the financial market.

1. Foreign exchange market: Forex

It is the market in which the question of the interaction of its participants is the currency and everything related to its equivalent. Derivative instruments can also serve as trading instruments (e.g., foreign exchange CFDs). Depending on the form, the agreement may be effective and not effective, according to the term of the transaction, the market may be current (spot) and derived currencies. Derivative market contracts may be:

-Forward. A forward contract is personalized between two parties at an agreed price, the intermediaries of the operation are the banks, we have no guarantees.

-Futures. Futures are priced on the basis of exchange rate movement, the intermediary is an exchange, the guarantees are the reserve deposit.

-Currency options and swaps.

Foreign exchange transactions can be carried out both on the stock exchange and on the OTC market (Interbank Foreign Exchange Market, Forex).

2. Credit market

In this market, there is a distribution of funds from those who have them to those who do not. Unlike in the investment market, the credit market is much more complex (it maintains a three-tier structure) and has stricter requirements for participants to meet their obligations. Levels of the credit market:

The central bank and the commercial banks. Here, the central bank acts as a regulator. Through loans, the central bank regulates the supply of money, supports banks facing temporary problems, maintains the liquidity of the banking system, and covers cash gaps.

-Commercial banks and their clients.

-Credit relationships between legal entities.

3. Insurance market

We’re talking about a separate segment because insurance companies are the world’s leading investors. By providing various types of insurance services, accumulate money, capital that can temporarily invest in metals, deposits, and stocks.

4. Investment market

It is a system based on partnerships and free competition between investment operators. It has a lot in common with the stock market, where funds are invested in stocks, but it could still take the form of equity investments, fixed assets, etc. In short, the investment market provides money to invest in any type of asset for the purpose of subsequent gains for a period of time due to an increase in the price of an asset or dividend payments.

5. Securities market: securities

It suggests a complex interaction between market participants in terms of issuance and the circulation of securities. Securities may be traded on both exchanges and beyond. In exchanges, you can only exchange registered assets that meet certain requirements. Assets can be:

They can be simple actions and preferred actions. Simple shares generally have voting privileges, while preferred stockholders may not. The dividend return is floating and may not be paid by the decision of the shareholders or in case of loss. Preference shares receive a fixed dividend from the company that does not give voting rights at the Shareholders’ Meeting.

Bonds can be (issuer – company), municipal (issuer – local authorities), state, international (for example, Eurobonds). Bonds can also be preferential (the holder will be among the first to receive money during the liquidation of the company) and subordinate (more profitable, but riskier). There is a gradation in the coupon rate and yield at maturity.

Indices are consolidated instruments consisting of a basket of securities, which reflect average price statistics for the sector or for the industry in general.

Derivatives are derivative instruments, which form a multi-level securities system.

ETF securities. An ETF is an indexed fund whose shares (units) are traded on the stock exchange. The investment structure of the fund can be any one, from securities of companies in a particular sector to a diversified portfolio, including shares, gold, etc. Unlike investment fund shares, it can carry out any transaction with ETF shares, as well as with values. As you can imagine, the Forex currency market represents one-fifth of the financial market.

There is another more general, but more accurate, classification of the world market: the foreign exchange market, the commodity market, and the stock market. The first includes all transactions with any currency (including cryptocurrency), the second includes everything related to securities, the third provides trading of metals, oil, goods, and services, including non-conventional investments (antiques, art, etc.). The three markets are connected by credit, investment, and other relationships.