International markets attract speculative capital like moths to a flame; most people throw money at securities without understanding why prices move higher or lower. Instead, they chase hot tips, make binary bets, and sit at the feet of gurus, letting them recommend buy-and-sell decisions that make no sense. A better path is to learn how to trade and invest in the global financial markets with skill and authority.
How to Trade and Invest in the Financial Markets – Quick Guide
If you are ready to trade the financial markets here is a quick guide to help you get started:
- Choose your strategy: trading is speculating on financial market underlying's without having to own them; whereas investing is taking outright ownership of financial assets.
- Open an account: Fill in our online form to create a Trade or Invest account. If you’d like to try your hand at trading in a risk-free environment, you can open a demo account.
- Open and monitor your position: Browse over 7,000 markets and make use of our extensive range of tools and resources to open your first position in the financial markets.
For a more comprehensive overview, our in-depth guide below explains the purposes different financial markets serve and clarifies the way they work.
What are financial markets and why do they matter?
Financial markets, also known as capital markets, Wall Street, and even simply "the markets” are marketplaces where traders buy and sell assets. These include stocks, bonds, currencies, commodities, and cryptocurrencies. The markets are where businesses go to raise cash to grow. It’s where companies reduce risks and investors place their money.
It cannot tell you whether your investment portfolio is likely to rise or fall in value. But it may help you understand how its value is determined, and how the different securities in it are created and traded.
The word “market” usually conjures up an image of the bustling, paper-strewn floor of the New York Stock Exchange or of traders motioning frantically in the futures pits of Chicago. But formal exchanges such as these are only one aspect of the financial markets, and far from the most important one. There were financial markets long before there were exchanges and, in fact, long before there was organized trading of any sort. Financial markets have been around ever since humans settled down to growing crops and trading them with others. After a bad harvest, those early farmers would have needed to obtain seeds for the next season’s planting and to get food to see their families through. Both transactions would have required them to obtain credit from others with seed or food to spare. After a good harvest, the farmers would have had to decide whether to trade away their surplus immediately or to store it, a choice that any 20th-century commodities trader would find familiar. The number of fish those early farmers could obtain for a basket of cassava would have varied day by day, depending upon the catch, the harvest, and the weather; in short, their exchange rates were volatile. The independent decisions of all those farmers constituted a basic 1 financial market, and that market fulfilled many of the same purposes as financial markets do today.
Types of Financial Markets
Most people think about the stock market when talking about financial markets. They don't realize there are many kinds that accomplish different goals. Markets exchange a variety of products to help raise liquidity. Each market relies on the other to create confidence in investors. The interconnectedness of these markets means that when one suffers, other markets will react accordingly.
This market is a series of exchanges where successful corporations go to raise large amounts of cash to expand. Stocks are forms of ownership of a public corporation that are sold to investors through broker-dealers. Investors seek trading opportunities when companies increase their earnings. This helps the economy to grow. It's easy to buy stocks, but it takes a lot of knowledge to buy stocks in the right company.
To a lot of people, the Dow is the stock market. The Dow is the nickname for the Dow Jones Industrial Average, which is just one way of tracking the performance of a particular group of stocks. There are also the Dow Jones Transportation Average and the Dow Jones Utilities Average. Many investors ignore the Dow and instead focus on the Standard & Poor's 500 or other major stock indices to track the progress of the stock market. The stocks that make up these averages are traded on the world's stock exchanges, two of which are the New York Stock Exchange (NYSE) and the Nasdaq.
Investment funds give you the ability to buy a lot of stocks at once. In a way, this makes them an easier tool to invest in than investing in individual stocks. Reducing stock market volatility, they have also had a calming effect on the economy. Despite their benefits, you still need to learn how to select a good ETF.
There are thousands of shares available to trade across stock markets all over the world. You can explore CAPEX.com’s offerings here.
When organizations need to obtain very large loans, they go to the bond market. When stock prices go up, bond prices tend to go down. There are many different types of bonds, including Treasury Bonds, corporate bonds, and municipal bonds. Bonds also provide some of the liquidity that keeps the economy functioning smoothly.
It's important to understand the relationship between Treasury bonds and Treasury bond yields. When Treasury bond values go down, the yields go up to compensate. When Treasury yields rise, so do mortgage interest rates. Even worse, when Treasury values decline, so does the value of the dollar. That makes import prices rise, which can trigger inflation.
Foreign exchange is a decentralized global market in which currencies are bought and sold. About $6.6 trillion was traded per day in April 2019, and 88% involved the U.S. dollar. Almost one-fourth of the trades are done by banks for their customers to reduce the volatility of doing business overseas. Hedge funds are responsible for another 11%, and some of it is speculative.
The forex market affects exchange rates and, thus, the value of the dollar and other currencies. Exchange rates work based on the demand and supply of a nation’s currency, as well as on that nation’s economic and financial stability.
The currency markets have no single physical location. Most trading occurs in the interbank markets, among financial institutions which are present in many different countries. Trading formerly occurred mainly in telephone conversations between dealers, but trading over computerized systems accounted for 55% of London currency trading – and 76% of spot business – in 2004. These systems work in different ways, but in general, a party seeking to exchange, say, €10m for yen will enter the request into a computer, and any interested banks will respond with offers of the exchange rates at which they propose to transact the trade.
A commodity market is where companies offset their future risks when buying or selling natural resources. Since the prices of things like oil, corn, and gold are so volatile, companies can lock in a known price today. Since these exchanges are public, many investors also trade in commodities for profit only. For example, most investors have no intention of taking shipments of large quantities of pork bellies.
Oil is the most important commodity in the U.S. economy. It is used for transportation, industrial products, plastics, heating, and electricity generation. When oil prices rise, you'll see the effect on natural gas prices about a week later. If oil and gas prices stay high, you'll see the impact on food prices in about six weeks. The commodities futures market determines the price of oil. Stay tuned with the latest Oil analysis and price predictions.
Futures are a way to pay for something today that is delivered tomorrow. They increase a trader's leverage by allowing him or her to borrow the money to purchase the commodity.
Leverage can create outsize gains if traders guess right. It also magnifies the losses if traders guess wrong. If enough traders guess wrong, it can have a massive impact on the U.S. economy, increasing overall volatility.
Another important commodity is gold. Gold investment is seen as a hedge against the diluting purchasing power of fiat currencies. Gold prices also go up when there is a lot of economic uncertainty in the world. In the past, every dollar could be traded for its value in gold. When the U.S. went off the gold standard, it lost this relationship with money. Still, many people look at gold as a safer alternative to cash or currency. Stay tuned for the latest gold analysis and price predictions.
Cryptocurrency markets are decentralized, which means they are not issued or backed by a central authority such as a government. Instead, they run across a network of computers. However, cryptocurrencies can be bought and sold via exchanges and stored in ‘wallets’.
Unlike traditional currencies, cryptocurrencies exist only as a shared digital record of ownership, stored on a blockchain. When a user wants to send cryptocurrency units to another user, they send it to that user’s digital wallet. The transaction isn’t considered final until it has been verified and added to the blockchain through a process called mining. This is also how new cryptocurrency tokens are usually created.
The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known today. Much of the interest in cryptocurrencies is to trade for profit, with speculators at times driving prices skyward.
The role of financial markets
Financial markets take many different forms and operate in diverse ways. But all of them, whether highly organized, like the London Stock Exchange, or highly informal, like the money changers on the street corners of many African capitals, serve the same basic functions.
The value of an ounce of gold or a share of stock is no more, and no less, than what someone is willing to pay to own it. Markets provide price discovery, a way to determine the relative values of different items, based on the prices at which individuals are willing to buy and sell them.
In countries with poorly developed financial markets, commodities and currencies may trade at quite different prices in various locations. As traders in financial markets attempt to profit from these divergences, prices move towards a uniform level, making the entire economy more efficient.
Market prices offer the best way to determine the value of a firm or of the firm’s assets or property. This is important not only to those buying and selling businesses but also to regulators. An insurer, for example, may appear strong if it values the securities it owns at the prices it paid for them years ago, but the relevant question for judging its solvency is what prices those securities could be sold for if it needed cash to pay claims today.
Firms often require funds to build new facilities, replace machinery or expand their business in other ways. Shares, bonds, and other types of financial instruments make this possible. Increasingly, the financial markets are also the source of capital for individuals who wish to buy homes or cars or even to make credit-card purchases.
As well as long-term capital, the financial markets provide the grease that makes many commercial transactions possible. This includes such things as arranging payment for the sale of a product abroad and providing working capital so that a firm can pay employees if payments from customers run late.
Futures, options, and other derivatives contracts can provide protection against many types of risk, such as the possibility that a foreign currency will lose value against the domestic currency before an export payment is received. They also enable the markets to attach a price to risk, allowing firms and individuals to trade risks until they hold only those that they wish to retain.
The stock, bond, and money markets provide an opportunity to earn a return on funds that are not needed immediately, and to accumulate assets that will provide an income in the future.
The Investors in Financial Markets
The driving force behind financial markets is the desire of investors to earn a return on their assets. This return has two distinct components:
- Yield is the income the investor receives while owning an investment.
- Capital gains are increases in the value of the investment itself and are often not available to the owner until the investment is sold.
Investors’ preferences vary as to which type of return, they prefer, and these preferences, in turn, will affect their investment decisions. Some financial-market products are deliberately designed to offer only capital gains and no yield, or vice versa, to satisfy these preferences.
Investors can be divided broadly into two categories:
Collectively, individuals own a small proportion of financial assets. Most households in the wealthier countries own some financial assets, often in the form of retirement savings or of shares in the employer of a household member. Most such holdings, however, are quite small, and their composition varies greatly from one country to another. In 2000, equities accounted for nearly half of households’ financial assets in France, but only about 8% in Japan. The great majority of an individual investment is controlled by a comparatively small number of wealthy households. Nonetheless, individual investing has become increasingly popular. In the United States, bank certificates of deposit accounted for more than 10% of households’ financial assets in 1989 but only 3.1% in 2001, as families shifted their money into securities.
Institutional investors are responsible for most of the trading in financial markets. An institutional investor is a company or organization that invests money on behalf of clients or members. The most important institutional investors are insurance companies, hedge funds, mutual funds, and pension funds. Other types of institutions, such as banks, foundations, and university endowment funds, are also substantial players in the markets.
Ways to invest and trade in financial markets
Investing and trading in financial markets can either refer to the physical exchange of an asset, or the practice of taking a speculative position on the underlying market price.
For example, while an energy company might need to buy crude oil, a commodity trader might just take a position on the future oil price using derivative products.
The intention behind trading financial markets is, of course, to make a profit. There are two ways in which traders can do this:
- By accurately predicting a market will rise in price
- By accurately predicting a market will fall in price
Going long on financial markets
Going long is considered the traditional method of ‘buying low and selling high’. You would look for assets that you believe are undervalued, and then opt to ‘buy’ the market in the hope that its value increases soon.
The loss or gain to the position would depend on the extent to which your prediction was correct. If the market did increase in value, you would close the position and take any profits. If the market decreased in the price instead, then you would make a loss.
Going short on financial markets
Going short is the process of buying an asset at a higher price and selling it at a lower price in order to capitalize on downward markets. This is also known as short-selling.
The traditional method of short-selling involves borrowing an asset from a broker and selling it at the current market price. If the market price falls, the asset can be bought back for a lower price and returned to the lender. The difference between the initial price and the new lower price would be your profit.
But when you trade financial markets via derivatives, rather than opting to ‘buy’ a market, you simply choose to ‘sell’ it on the deal ticket. As you don’t have to deal with the physical asset itself, you can do this without a third-party lender.
If your prediction was correct and the market did decrease in value, you’d close the position in profit. If the market increased the price instead, you’d incur a loss.
Trading vs investing: What’s the difference?
The difference between trading and investing lies in the means of making a profit and whether you take ownership of the asset. Traders attempt to profit from buying low and selling high (going long) or selling high and buying low (going short), usually over the short or medium term.
Investors will also attempt to profit from buying shares at a low price and selling high, but over a longer term. They may also aim to earn income in the form of a dividend. Other major differences between trading and investing include:
Investing time horizon - this can span years or decades because the objective is long-term wealth accumulation, while trading involves much shorter time spans, ranging from less than a day to a few months. The number of trades - because investing means buy and hold, the number of trades is usually much lower than in trading, where frequent trades are the norm. Type of trades - investing typically involves long positions only, while online trading may include long and short positions to benefit from both higher and lower market moves.
Access the financial markets with CAPEX.com
We challenge ourselves to develop the world's best technology, platforms, products, and exchanges – opening a wider range of trading and investment options in the financial markets to ambitious people around the globe.
Products that power
We power the pursuit of financial markets through our versatile trading and investment products.
We’re widely known for our core offering – leveraged trading. Traders in Europe and many more places trade contracts for difference (CFDs). Our clients can access around 2,100 global financial markets including shares, forex, indices, commodities, and other instruments via our market-leading platforms and apps that provide lightning-fast and secure execution.
We also have an ever-growing suite of non-leveraged share dealing products, designed to help the financially ambitious no matter what their risk appetite. These longer-term investments are available through the CAPEX.com platform and apps with a CAPEX Invest Account.
CFDs are derivative contracts that enable traders to take advantage of short-term changes in an asset’s price without owning the asset itself. Traders can take a position in a financial instrument, ‘buying’ if they think the price will rise or ‘selling’ if they believe it will fall, while only putting down a small percentage of the value of their trade as security – known as trading on margin. This can lead to amplified profits but also magnified losses. Our clients can use tools such as stops and limits to manage their risk, though, while retail clients automatically have negative-balance protection on their accounts.
Stocks and ETFs
Launched in 2022, it enables self-directed investors to buy and sell over 5,000 global shares and exchange-traded funds (ETFs) with extremely competitive and transparent transaction fees.
You’ll likely find your sector here, no matter what kind of investor you are. From gold and oil miners to e-commerce and tech giants with activity in the field of artificial intelligence, there are thousands of different companies to invest in.
CAPEX.com Smart Portfolios
Thematic investing and basket trading are available also. Thematic investing is a longer-term form of gaining exposure to the movements of a specific trend or ‘theme’ such as artificial intelligence (AI), electric vehicles, robotics, memes, or any other macro event or market movement.
Basket trading means taking a position on a group of assets simultaneously – for example, a theme – which are all grouped together into one index, ETF, or ‘basket’. You can take control of your financial portfolio and build a sophisticated basket of investments online, rather than only choosing specific stocks.
How to get started?
Open an account Find an opportunity Open and monitor your first position You can apply for a Trade account or Invest account online. Once we've verified your identity and approved the account, you can add funds using your debit card, PayPal, or via bank transfer. If you’d like to try your hand at trading in a risk-free environment, you can open a demo account. Browse over 7,000 markets and make use of our extensive range of tools and resources to find your first trade. Then, choose which market you want to trade based on your experience and risk appetite. All trading involves risk, especially if you are trading using leverage, which is why you need a risk and money management strategy to protect against unnecessary losses. Once you have completed these steps, you can decide when to enter the market. When you trade with CFDs, you can speculate on both rising and falling markets. If you think the price will rise, you will open a position to ‘buy’, and if you think the price will decline, you open a position to ‘sell’.
Essentials of trading in the financial markets
Once you have decided how to trade and what financial markets you will trade on, there are a few other steps that we would recommend taking before you open a position.
- Carry out research
- Create a trading plan
- Choose a trading style and strategy
- Perform analysis: technical and fundamental
- Build a risk management strategy
- Gain trading experience
1. Carry out research
When you first start to look at financial markets there can be a lot of jargon and processes to get your head around. This is why it is important to do your research before you trade.
Not only are there different market hours and regulations, but the driving forces behind each market can be extremely varied. For example, while the stock market is largely influenced by company earnings reports, the forex market is more sensitive to political news and economic data releases.
However, there is no need to be put off if you don’t understand something as there are some great resources out there to help you hit the ground running.
CAPEX Academy has a range of online trading courses that can enable you to develop your knowledge of financial markets – this includes courses on the stock market, CFDs, technical and fundamental analysis, and financial risk. Alternatively, you could look at other resources such as financial market podcasts and trading books.
But remember, understanding financial markets and how they operate isn’t an overnight process. In fact, there isn’t really an end to how much you can learn.
2. Create a trading plan
Before you start to trade financial markets, it is important to consider exactly what you are hoping to achieve. These targets need to be realistic: if you expect to make lots of money immediately, you might be sorely disappointed.
This is why many traders create a plan that will outline all of the parameters for their decisions going forward. It should set out exactly what you plan to trade, when you will trade, and how much capital you will dedicate to each position. A trading plan should always be unique to you and your risk appetite, but there are a few things a successful plan should cover:
- Your motivation for trading
- How much time you can commit
- Your trading goals
- Your attitude to risk
- Your available capital for trading
- Your trading style and strategy
- How you will manage risk
3. Choose a trading style and strategy
A trading style determines how often you’ll trade and how long you’ll hold each position. Although your style will be unique to you, there are four that have become popular:
- Position trading - Position traders focus on the overall market trend and are unconcerned with smaller price movements.
- Swing trading - Swing traders look at entering and exiting positions at dips and peaks within a larger move.
- Day trading - Day traders will buy and sell multiple assets within a single day to take advantage of volatility.
- Scalping - Scalpers will close trades as soon as the market moves in their favour – taking small and frequent profits.
Once you’ve chosen a style, you’ll need to decide exactly how you’ll enter and exit trades – this is known as a trading strategy. Common strategies include:
- Trend trading - This strategy relies on technical analysis to identify overarching trends. Positions are held for as long as the trend lasts.
- Range trading - By focusing on range-bound markets – which move between support and resistance lines – short-term traders can capitalize on small oscillations in price.
- Breakout trading - This is the strategy of entering a given trend as early as possible to profit when the price ‘breaks out' of a range.
- Reversal trading - By identifying when a given trend will reverse, traders can enter positions and capitalize on the change in market sentiment.
4. Perform analysis: technical and fundamental
Your trading strategy will be based on fundamental or technical analysis – or a combination of both.
If you choose to look at the fundamental analysis, your trades will revolve around economic indicators,
company reports, and breaking news. Whereas if you decide to use technical analysis, you will focus on chart patterns, historical data, and technical indicators.
Let’s say a fundamental and a technical analyst were both considering buying Amazon shares.
A fundamental analyst would examine AMZN’s recent earnings reports, how the entire e-commerce sector is performing, and the health of the US economy before deciding how much they think Amazon shares are worth.
A technical analyst would pay attention to the Amazon share price chart and use technical indicators to find patterns in historical data that could suggest where the share price might move in the future.
5. Build a risk management strategy
Creating a risk management strategy is a crucial step in preparing to trade. By putting measures in place to prevent the worst-case scenario, traders can minimize any potential losses. Risk management tools such as stop-losses and limit-close orders are an essential part of any trader’s toolbox.
Stop-losses instruct your provider to close a trade when the price of a market hits a specific level that is less favorable than the current price. This means that you can select a level of risk that is acceptable to you, and the stop-loss will close your position automatically when the market hits this predetermined amount of loss.
Limit-close orders instruct your provider to close a trade if the market price reaches a specified level that is more favorable than the current price. This enables you to lock in any profits.
6. Gain trading experience
When you first start thinking about investing and trading in financial markets, the idea of putting your capital at risk can seem daunting. However, you don’t have to throw yourself in at the deep end. You can practice trading in a risk-free environment first by using a demo account.
When you create a demo with CAPEX.com, you’ll be given $50,000 in virtual funds that you can use to open and close positions. This will help you build your confidence in trading CFDs and get to grips using our online platform.
If you’re confident in how to trade, you can open an account and start trading on live financial markets.
Essentials of investing in the financial markets
The start of a solid foundation when investing is knowledge of the key financial markets concepts. Here are a few you need to know:
What’s a stock exchange?
A stock exchange is a centralized financial marketplace where assets such as shares and bonds are bought and sold for money. Just as you’d go to a marketplace to buy and sell goods like food or clothing, financial assets like shares and ETFs have marketplaces, too.
What are dividends?
Dividends are payments given to shareholders by the company they’ve bought shares in, which usually come out of company profits. Companies that do well financially are more likely to give dividends, or larger dividend payments, than ones that are struggling. However, some companies choose to not pay dividends to fund ventures such as product development or expansion.
It’s important to note that companies aren’t required to pay dividends but may choose to. Some companies pay dividends regularly and predictably, for example each quarter, while others give ‘special’ dividends more sporadically and only if certain profit margins are met. In such cases, dividends can be regarded as ‘bonuses’ rather than primary source investment income.
Companies announce their dividends ahead of time. When a stock is ‘cum dividend’, it’s due to be paid out soon, on the specified ‘payment date’. Close to this time, that stock is ‘ex dividend’, meaning that payouts are imminent and, if you were to become a shareholder now, you’d only be eligible for the next dividend and onward.
What causes share prices to rise or fall?
Share price appreciation and depreciation are determined by several factors, both within the company itself and the wider market.
Different shares are worth different amounts of money. A share’s value will vary depending on whether you’re looking at its fair value or its market value. The fair value is the intrinsic value of a stock based on the company’s fundamentals, while the market value is the amount that individuals are currently willing to pay for the stock.
At its simplest level, share prices and the value of ETFs increase when the company or fund is performing well in the marketplace, is well managed, and has support or popularity from the public. Events like the company’s latest earnings season or a high-profile press conference can spike or drop share prices temporarily.
- Financial markets refer broadly to any marketplace where the trading of securities occurs.
- There are many kinds of financial markets, including (but not limited to) forex, commodity, stock, and bond markets.
- These markets may include assets or securities that are either listed on regulated exchanges or else trade over-the-counter (OTC).
- Financial markets trade in all types of securities and are critical to the smooth operation of a capitalist society.
- When financial markets fail, economic disruption including recession and unemployment can result.
- With CAPEX.com you can access the financial markets through 7,000+ trading and investing products.