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Understanding Financial Markets; Stocks, Bonds, Crypto, Forex, And Money Markets

Fintech

July 7, 2021, 6:41 p.m.

One way or the other you might have engaged in a financial market without knowing. Daily, people across the globe transact across different financial markets; some making windfalls while some lose also lose huge sums. Some do not participate at all in any financial markets. What is revealing about this is that those who do not participate in any financial market are usually those who do not invest at all. This group of people, because, they do not invest, are also likely not to earn more income or build assets that can earn more income. To summarize, it is imperative to understand financial markets and how they work. Understanding financial markets and how they work gives an insightful perspective about investment and positions you to maximize your capital (money).

There are different types of financial markets; some traditional and other emerging (newly developed). This article isn’t looking at that per se. Rather, this article will focus on educating you on financial markets in terms of asset classes. Before we look at some of these financial markets, it will do you a lot of good to realize that anyone can invest in a financial market, usually, depending on one’s attitude towards risk and income level. Now, let’s delve right into what financial markets are and how they work;

The Stock Market

The stock market is a financial market where people trade and invest in shares of companies. If you want to own a part of a company, then your go-to-market is the stock market. In many countries, there is usually a stock market where people can invest in companies listed on the market. Stock markets have developed to a point where people can now invest in listed companies in countries they do not necessarily reside in. Investing in a company makes you a part-owner of the company, or what is usually called in financial terms a stockholder. Being a stockholder entitles you to dividends (profits of the company) whenever they are declared.

The Bond Market

The bond market works is typically a debt market. In the bond market, an entity (company or government) takes a loan from the people to run its operations to make money to pay back the loan to the people. There are different ways bonds (or debts) are arranged in this market. The government issue bonds to raise money from people (investors) to undertake projects. These projects, when they perform well earn money and the government pays back the people with the money earned. The same applies to companies too. When a company issues a bond, it is typically borrowing money from people to run its business to make money and then subsequently pay back the people it borrowed from. The investment here lies in how people give their monies to the government and companies to be used to generate money so they can be paid more than how much money they originally gave to the government or company. For every bond issued, there is a return (in percentage) that determines how much you will earn for the money you are giving to the issuer (government or company).

The Money Market

The money market is typically a short-term financial market where people invest to earn some returns within the shortest possible time. The money market covers financial instruments such as mutual funds, treasury bills, certificates of deposits, and unit trusts. Investing in the money market typically means you are putting your money in a pool with other investors where the pool (total funds) raised is invested across the financial instruments stated. The Money Market is typically for highly risk-averse investors.

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The Forex Market

The Foreign Exchange (Forex) Market is also known as the currency market. This market is an arrangement between buyers and sellers (collectively called traders) of currencies. Investing in forex means investing in a currency hoping that its value will increase against another currency so that the incremental becomes your profit. The Forex Market is highly volatile in the sense that it is a very risky market because of the constant change in currency prices.

The Crypto Market

Cryptocurrencies have become popular in recent times and gaining a lot of traction. Cryptocurrencies are built on blockchain technology are gradually becoming an accepted mode of exchange of value among other things such as payments. Cryptos are coin ownership stored in a ledger backed by a computerized database. The interesting thing about cryptos is their diversity in nature and how quickly their value has risen in recent times. Cryptos are not physical and are broadly classified as digital currencies. This means they can be used everywhere when they become universally acceptable. Also, being built from blockchain means that they are more secured to an extent. In the midst of this, cryptocurrencies are quite volatile and call for strong understanding before you set out to invest in them.

Conclusion

Investing in any financial market requires you to have an understanding of the market. Many times, you would have to engage an expert to facilitate investing or trading in a financial market. For the stock market, you need to have a stockbroker invest/trade on your behalf. Essentially, if you do not have any general understanding of how the market works, you may be exploited by the expert representing you.

You can start your journey towards understanding financial markets by joining the webinar happening on 21st July 2021 (7 pm) being organized by African Observations (AO). African Observations (AO) is a mobile app that seeks to help people make better and informed financial decisions by providing them with financial information, education, advice, and management tools. AO is available on Android and iOS for download.

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