Different Types Of Financial Markets You Can Invest In

Financial markets broadly represent a wide range of marketplaces that facilitate trade, which is the sale and purchase of assets like stocks, bonds, foreign exchange, derivatives, etc

Financial markets broadly represent a wide range of marketplaces that facilitate trade, which is the sale and purchase of assets like stocks, bonds, foreign exchange, derivatives, etc. Much has been said about the Stock Market and its power in terms of growing the economy of any country as well as to build wealth for the investor.

However, many more markets exist where investors can build wealth while also contributing to the growth of different segments of the economy. While Yochaa’s core objective is to educate investors and intending investors of the wide potential of the Nigerian Stock Market, an understanding of all the other options will give a more holistic approach to investing giving you the opportunity to diversify your investment portfolio.

Here’s a rundown of the commonest markets you can also be a part of.

Stock Market

The stock market is simply a market where you can buy and sell the shares of stocks of publicly traded companies. Purchasing stocks in the stock market gives you ownership claims on the business or company you’re investing in.

You simply buy at a share price and allow your funds to grow for value creation. The goal here is to choose the right stocks based on your investment objective and make accurate investment decisions like reinvesting your dividends until your goal is attained.

Money Market

Another very common market is the money market where short term securities are traded. Unlike the stock market, the money market is relatively safe as it is issued by the government, banks or big companies that need short term financing. Because they are short term, you can also get your funds in cash with ease.

This is where you find investments like treasury bills, commercial papers, certificates of deposits and so on. A downside to the money market, however, is that as a result of its relatively low risk, the rate of return can be really low.

Derivative Market

The derivative market is more of a futuristic market. Here, two parties can have a transaction that doesn’t take place until the future. The idea is to be able to lock down the details of the transaction between the trading parties with the aim of passing the transaction risk to a third party. Here we have swaps, futures, options and so on.

Bond Market

The bond market functions based on debt securities. These debt securities are typically issued by the government and the investor simply lends the government his or her funds at a fixed rate or a variable rate depending on the terms of the transaction.

Just like any loan, the bond is reimbursed fully at maturity and the gains are tied to movements in the interest rate on the loan. The higher the risk involved in the transaction, the higher the possible interest rate and vice versa.

Commodities Market

Last on the list is the commodities market where investors buy and sell natural items and agricultural produces. It can go from cash crops to meat, oil and so on. It is a form of a futures contract on its own as you will generally agree on terms today in a commodity exchange and not receive your goods until much later in the future.

The above markets have their gains and their risks. However, an understanding of the ones that will provide the best results to your investment objective will steer you in the right direction.

Written by Lawretta Egba.