Introduction to the Financial Markets

When it comes to the financial markets, all the information and terminologies can be really overwhelming. This usually scares away a lot of people who are thinking about participating in them. But once you understand the bare bones of the financial world, it becomes a lot easier to build your knowledge from that point on. In this post I will try to provide you with a general framework, off of which you can then grow your knowledge and delve into the financial markets.

There are three basic elements you need to understand.

1) Assets

An asset is basically something that has value. The asset can be cash, land, stocks etc. And trading/investing is the exchange of one asset for another. For example, when you are buying shares of a company, you are giving the company your money (asset) in exchange for a small piece of ownership of their company called a share (asset). The whole goal of trading/investing is to own assets that you think will over time increase in value. In the context of the financial markets, no physical assets are exchanged. Instead, financial instruments, which are contractual agreements between two parties, are exchanged.

2) Brokers & Platforms

Once you figure out what asset you want to buy, you need a place and a way to buy these assets. Brokers are the middle men who will provide this for you. You will have to create an account, deposit your money and then buy assets through them. In return the brokers get paid commissions for providing their services. Once you create an account the broker will provide you access to their trading platform. A trading platform is a mobile/computer program through which you can login to your account, research different types of assets and then buy or sell them. It is very important to choose brokers that are registered and regulated by the respective government's regulatory bodies as unregulated brokers may scam you. Now you may be wondering, where and how do the brokers buy the assets I ask them to? That's where the next part comes in.

3) Exchanges

An exchange is a place where the trading assets are registered and made available to the public. For example, if a company wants to go public and sell shares to people, they will have to register with an exchange ex: The New York Stock Exchange. If they meet the standards and guidelines of the exchange, the exchange will then make their shares available for the public to purchase. How does the public purchase these shares? through a broker who is registered and has access to the exchange. There are a lot of exchanges all over the world. And there are different exchanges for different types of trading assets.

These are the three key elements that are the foundations of the financial markets. I will go into further detail regarding the individual types of assets in the next few blog posts.

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