Different Segments of the Stock Market
By: Merlin Joy, Senior Financial Trainer, Venteskraft
April 2, 2020
There are different segments of stock market. Not everyone trades in a single segment only.
Equities: This is where shares of various stocks are traded through exchanges. They are accounted as the most essential part of the market economy as companies are exposed to capital and investors. In equity platform, buyers and sellers trade securities which are either public stock or private stock that are traded through dealers.
Equity markets function well in coordination with both the seller and the buyer. Usually, the investors offer a specific price and the sellers want another certain price. When these prices match a sale occurs. Sometimes there could be many investors offering the same price, in that case, the investor who first bid the price will get the stock. Here both buying and selling are taking place at the market value. Just like why common people take stock market for an extra source of income and companies invest in stocks to improve their revenue. Also, all companies listed in the stock market are represented as publicly traded stocks. The risk factor is when the company is not performing well, the prices fall indirectly or directly affecting the investors. The price fluctuations occur usually due to the demand balance of the share. As the demand increases so do the price for that particular share.
Exchanges are where the stocks are traded. In India, the two main exchanges are namely NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). Pro traders tend to trade mostly in NSE as the volume is seen to be much higher than in BSE stocks. Equities are less prone to volatile swings than futures.
Commodities: Unlike in Equity trading, in Commodity Markets, physical substances like gold, copper, crude, etc. are traded on a contract basis. Commodities can be an important way to diversify the trader’s portfolio beyond traditional securities, either for the long term or as a place to park cash during unusually volatile or bearish stock markets, as commodities traditionally move in opposition to stocks. Here too the supply-demand balance lays out the principles as with lower supply, demand rises. If there are strong imbalances in the supply it might lead to the generally unstable demand. There are different types of investments in commodity markets such as metals, energy, livestock, and meat. Stock options are one way to trade in commodities with smaller investments. The stocks are usually highly liquid. Trading is easier with stock options in commodities as investors already have a brokerage account. One factor traders need to look into is that the price may be influenced by certain factors of the market conditions. Another way of investing in commodities is via futures. This is an agreement to buy and sell a commodity quantity at a fixed price at a later time. High leverage is provided with such type of trading in commodities. The trader can go long term or short term easily. On the other hand, futures can be highly volatile and investing in such market conditions can be risky. With high leverage comes risk as well because it can magnify both profit and losses.
Derivatives: Derivative trading is a contract based trading between two or more parties and its price is formed from variations in the underlying asset. Some of the common assets in derivative trading are bonds, commodities, currencies etc. where all these are purchased through brokerages. Traders usually use futures contracts to hedge their risks. The parties involved in the futures transaction are obligated to fulfill a commitment to buy or sell the underlying asset.
The major factor that distinguishes futures from option trading is that the buyer is not forced to exercise their agreement to buy or sell. It’s just considered as an opportunity rather than an obligation. Derivative trading is a beneficial tool for investors as they provide a way to lock in prices and hedge risks of the trader. On the contrary, delivery trading can be difficult to value since they are based on the price of another set.
Foreign exchange: Foreign Exchange is where one currency is changed into another for commercial reasons, especially for foreign trades across the world. There is no central market place for foreign exchange as the currency is traded electronically, known as OTC (Over the Counter). The foreign exchange market is open 24/7 and currencies are traded worldwide. Since most currency traders are multinational companies or high net worth individuals it will be difficult for individual investors in Forex markets. Most online brokers or dealers offer very high leverage to individual traders who can control a large trade with a small account balance. Definitely, the currency being the asset traded there are high risks tagged along with Forex trading. Rules and regulations are imposed by the industry particularly for the sole protection of each and every participating bank. The Forex markets are big when it comes to daily trade volumes offering the most liquidity.
So now that you have the knowledge about different segments of stock market, you can trade in whichever segment you are comfortable.
