Financial Markets 101 explained by a 13-year-old.

Finance may not be the coolest subject for people, and most of the people I know were surprised to hear a 13-year-old interested in such a topic. However, I feel that finance is one of the most impactful sectors as it’s involved in the scaling of any exponential technology or idea out there.

Finance markets such as the stock market allow several companies to gain capital otherwise hard to achieve. On top of that, many of these markets have a somewhat low barrier of entry allowing the average joe to make money from these markets.

In this article, I want to be transparent about what I want to discuss and what I hope you get out of this article.

1. A deep understanding of each of the major financial markets out there and how you can enter into each of these financial markets.
2. How each of these financial markets applies to your industry or sector and the problems facing each of these financial markets.
3. The disruption going on in each of the financial markets through the use of Fintech.

#1 the Stock Market

Stocks by far get the most notary compared to all the financial markets. The people down in Wall Street may seem really intimidating at first, but what they do is, in fact, a very simple concept.

When you buy a share of a company you buy a part of there company, obviously a very small part of their company though.

Let’s say you bought one share of Walmart for 115 dollars. You basically own 0.000000…% of Walmart. Thus, if Walmart as a company grows by 1% the value of your share increases by 1% to 116.15 dollars, and if you could sell your share for 116.15 dollars for a 1.15 dollar profit.

That’s what we call a short term investment or a trade. Trading is for a short term profit and investing is for a long term profit after several months or years. Stocks, however, are more of a long term investment.

In fact, from 1945 to 2019, if you invested in Dow Jones even after stock market crashes your share value would grow almost 10 times.

The stock market is a much better long term investment and that’s why there are stock brokerage firms like Wealthsimple and Questrade, that easily help you create a portfolio for investments for an extremely low commission as low as $0.52 for one hundred shares.

On top of that if you would like a diverse portfolio for trading. Thanks to index funds like Vanguard index funds you can purchase a share of every oil company out there with ETF’s or Exchange Traded Funds.

However, if you want to invest in something you believe is doing good for the society you can invest in SRI’s or Socially Responsible Index Funds. There are so many options when it comes to investing in stocks.

Already there’s a high chance that the company you work for is a publicly traded company on the stock market. And the capital you give by buying a share helps the company invest in super projects you know of and drive up the value of the company 10x.

Fintech has already disrupted the Stock Market. The largest brokers for stock trades and investments are now moving from tradition in person brokers to companies like Wealthsimple, Questrade, and Robinhood.

You no longer need to live near stock exchange like the New York Stock Exchange as long as you have access to good internet connection you can trade from anywhere.

#2 the Forex Market

Forex stands for Foreign Exchange. Forex is conceptually the same as the stock market. It’s basically investing in the currency of each economy or buying a share of the entire economy. Now Forex investments can’t be as volatile as stocks since these are companies we’re talking about the entire lively hood of a nation’s economy.

Forex works in the sense that you buy a number of units of currency and when that currency gains in value you can sell it and make a profit. Since a currency can’t be too volatile it doesn’t increase by each cent it increases by pips.

One pip is the ten-thousandths of one unit of the currency or 0.0001. When forex trading you don’t forecast the value to increase by 1 cent you forecast the currency to increase by one or two pips. That’s why to make a true profit from trading forex you need a large number of units.

In order to make $10 from a one pip increase, you need to trade 100,000 units (100,000 dollars) of the currency.

You may be wondering how you could get 100,000 units of a currency and the answer to that is something called lots. Lots are when your forex broker loan you a certain amount of units of the currency purely for trading purposes.

Now to receive that 100,000 units you have to pay a leverage fee or basically something that would ensure the broker that you can pay back the money. The leverage is something like 100:1 you would have to pay $1000 for that $100,000, and once you complete that forex trade you would receive that $1,000 back.

#3 The Crypto Market

The crypto market is the newest market created to date and it’s also the market that is the most intertwined with Fintech as its not a physical asset instead its a digital asset. It works just like any other currency only a certain supply of tokens are produced by miners or supercomputers.

And just like any other currency if the supply remains the same but the demand for the currency increases. The value of the currency increases. However, now some currencies have some assets attached to the token. Basically imitating shares and bonds with tokens.

To purchase a token it’s very simple all you need to do is go on an exchange such as Coinbase or Binance and purchase a token from any currency like Bitcoin or Ethereum and sell when the value increases. The problem is that with cryptocurrency the time to exchange is super slow compared to centralized markets.

Every other financial market has an indication of where the price is going however, cryptocurrencies are a new currency which has absolutely no good indication of price.

What many people recommend is to make crypto a very small percentage of your investment portfolio. As its the one currency which isn’t related to all the other currencies and centralized systems. Many say that if all of your centralized investments fail crypto will rise as it has no correlation with all the other markets.

#4 The Bond Market

Bonds are basically when you get a small portion of a project to be initiated. When you purchase a bond you give your money to fund a project and the company promises you that a few years from now you’ll get the money you gave them and some interest.

There are several bonds you can purchase municipal bonds, federal bonds and corporate bonds. You can also get bonds by using ETF’s and Mutual Funds using the bank you usually use.

Some bonds can go as high as a 12% return. Bonds are a secure way to put your savings, unlike stocks your investment in bonds won’t compound.

#5 The Commodities Market

The commodity market is the market based on the physical commodities we want. It is the least intertwined with Fintech and is more based on again the physical supply and demand of the commodities.

The most popular commodities to invest in are commodities such as oil or gold. These commodities are the oldest living investments. However, just like crypto, it’s super hard to predict the value of the commodities as you would have to constantly track the supply of the commodities in the world.

As you guys can tell. This is a very brief summary of all the financial markets. However, hopefully, it gave you guys some backgrounds knowledge if you would like to enter any of these financial markets in the coming future.

Please don’t hesitate to contact me at rishabchakraborty7@gmail.com if you have any questions or opportunities available.