- Financial Markets
This introduction to the global markets will look at the key markets you can trade on CMC Start, including forex, indices, commodities, shares and treasuries. It will also outline a few factors to consider before making your choice.
Remember, when trading CFDs you never actually own the asset or instrument you have chosen to trade. However, you can still benefit if the market moves in your favour, or make a loss should the market move against you.
Forex (also known as foreign exchange or FX) is a financial market for trading international currencies. Currencies are the world's largest and most active trading market, with a total daily average turnover reported to exceed $5 trillion a day.
Forex trading is done in pairs, with one currency being traded against a different currency – for example GBP/EUR (sterling v euro). Pricing is based on the first currency in the pair, also known as the base currency (in this case GBP). The second currency in the pair is known as the counter currency (in this case EUR). With GBP/EUR, this means how much EUR it would take to buy one GBP.
Returns in the forex market are relative, with profit and loss being measured by how one currency performs relative to another. When GBP/EUR goes up it means that GBP is gaining in value, and when GBP/EUR goes down it means GBP is losing value (or EUR is gaining value). You speculate on whether the price of the base currency will rise or fall against the counter currency. So if you think GBP will rise against EUR, you buy (go long) the currency pair. If you think GBP will fall against the EUR, you sell (go short).
Some of the most actively traded currency pairs include EUR/USD, EUR/GBP, GBP/USD and USD/JPY.
Like other markets, currency values tend to be based on supply and demand. Generally speaking, traders tend to favour countries and currencies with higher interest rates, political and financial stability and higher economic growth (higher potential for profit from investments) over countries with lower interest rates or slower growth.
Indices, such as the UK 100 or US SPX 500, gauge the prosperity or value of a section of the stock market. Their values are calculated from the prices of selected stocks, usually using a weighted average.
Trading broad market indices provides a way for investors to increase their diversification over individual shares, given that indices encompass a range of stocks and shares.
Most tradable indices are based on a group of the largest and most actively traded companies on a particular exchange, or in a particular country.
Some of the indices available with CMC Start include:
Generally speaking, indices in the same region tend to perform similarly over time because the largest companies tend to have multi-national operations close to each other.
A commodity is a physical good, such as food (cocoa and sugar), metal (gold and silver) or fuel (oils and natural gas).
Commodity prices are mainly impacted by changes in the supply and demand of the particular goods being traded. Speculators are those interested in attempting to profit from changes in prices as supply and demand conditions change, and have no intention of delivering or taking delivery of physical goods. Most people who trade commodities will fall into this category.
Commodities tend to fall into a number of groups that share similar influences:
While most people may consider precious metals as jewellery, gold and silver in particular have been used as currencies for centuries. Because of this, precious metals tend to be viewed as a store of value and tend to attract interest during times when investors are concerned that the value of paper money (particularly the US dollar) may fall.
Energy prices and demand for resources tends to be linked to global economic growth, as people tend to use more energy during good times and cut back during lean times. Weather can also have an influence on the pricing of energy commodities that are used in home heating, such as natural gas.
A significant part of the global energy supply, particularly crude oil, tends to be produced in or travels through politically unstable regions. Because of this, political risks can impact the price of oil, particularly during times when supplies may be limited.
Although crude oil is a global market, prices tend to be more sensitive to economic conditions in the US and China, the world's largest energy consumers.
As more economies have evolved from subsistence farming to emerging industrial societies in recent decades, the demand for agricultural commodities has been steadily increasing.
Grain prices tend to be impacted more by developments on the supply side of the market. Developments that have a negative impact on supply can lead to shortages and push prices up (for example droughts, freezes and floods). On the other hand, when prices rise farmers tend to plant more crops so the impact can be mitigated over longer periods of time.
There are a number of other commodities that can be traded, including coffee, sugar and cocoa.
The commodities offered on CMC Start are forward contracts (with the exception of Gold and Silver which are cash products). Forward contracts have a fixed expiration or settlement date. You are able to automatically rollover forward positions to keep a trade open beyond its expiry date, and there will usually be small charge for this. For more information see our Costs page.
Most people first become familiar with the world of trading through individual shares and stock markets. Companies around the world, such as Amazon and Facebook, issue shares to the public for many reasons, primarily to raise capital for expanding their business. The sale of shares from a company's treasury to shareholders is known as the primary market.
Once a company completes its initial public offering, its shares then usually trade on a traditional stock exchange such as the NYSE (New York) or LSE (London). Alternatively they list on an over-the-counter exchange such as NASDAQ (New York), where trades are executed directly between brokerages. Both of these are known as secondary markets.
Individuals looking to make money in the stock market would look at making a profit on a favourable price move, either from the long side (buy low and sell higher) or short side (sell high and buy back lower). Generally speaking, share prices tend to increase when positive things are expected to happen to a company, such as improved earnings from increased sales or new contracts, or a higher dividend, or a takeover bid or other development. On the other hand, expectations of negative developments such as a slowdown in the business, regulatory changes, losing contracts and political changes, can lead to a fall in share prices.
Factors which impact market expectations can include macroeconomic factors (that influence the business environment), industry factors (such as changing commodity prices), and company-specific factors (such as earnings, dividend changes, and other business developments).
One regular development that tends to influence trading is a company's earnings report. The timing of these reports tends to be publicised well in advance. How a company's results and future guidance fare relative to expectations can have a major impact on short- and long-term trading trends.
Treasuries, also known as government bonds, are another active trading market, giving traders the opportunity to trade off grander macroeconomic trends in various countries. Treasuries you can trade with CMC Start include UK Gilt and Eurodollar.
Most large investors such as banks and institutions tend to purchase bonds with the intention of holding them to maturity, and view the interest rate on the bond as the primary return on their investment. Over time, bond prices tend to fluctuate along with economic conditions, creating opportunities for traders.
These interest rates tend to be driven by two major factors: inflation and repayment risk. In order to earn income over time, investors need their bonds to return at least the rate of inflation in the issuing country. In addition, investors tend to demand a premium to cover the risk that the bond issuer may default on either the principal or interest payments.
As the interest rate on most bonds is fixed after issuance, bond prices change over time to reflect changing interest rates. Suppose a 10-year bond is issued at 5% interest and a year later, new nine-year bonds are being issued at 4%. As the 5% bond carries a higher interest rate, all else being equal, investors would be willing to pay more for that bond. On the other hand, if investors could get 6% on new nine-year bonds, they would not be willing to pay as much for the 5% bond.
Bonds tend to be issued at a price of 100.0, known as par, and are expected to be redeemed for the same price at maturity. If interest rates on new bonds increase, the price of existing bonds tends to drop so that they trade below 100.0, or at a discount. The potential for capital appreciation offsets the lower interest rate. Similarly, if the interest rate on new bonds falls, the price of existing bonds tends to rise to trade at a premium to par, with the capital loss over time offsetting the higher interest rate.
Understanding this inverse relationship between interest rates and bond prices is key for bond traders.
The treasuries offered on CMC Start are forward contracts which have a fixed expiration or settlement date. You are able to automatically rollover forward positions to keep a trade open beyond its expiry date, and there will usually be small charge for this. For more information see our Costs page.
Only you can decide. Choosing which markets to CFD trade can seem like a complicated or daunting process, but there are a few factors which can help you decide.
Some people new to the industry may start by speculating on the shares of companies they are familiar with, or which are located in their own country, before branching out internationally or trading different asset classes.
Traders who have become familiar with trading in one area may want to expand into related areas. For example, expanding trading from shares to indices (such as Amazon shares to the US NDAQ 100), or from resource shares to related commodities (such as BP to Crude Oil).
Those interested in taking advantage of broad national or global trends may find currencies, treasuries or indices more appealing. On the other hand, those interested in doing some digging and finding unnoticed opportunities may find trading shares more interesting.
Which markets are active during certain times of day might also influence a trader’s decision. For example, for those who wanted to trade during their business day, markets in the same region as them may offer the best opportunities. For those who plan to trade in the morning or evening, there may be more opportunities in other regions.
Although the details of investing in different markets or asset classes may vary, the underlying drivers of movement tend to be the same across markets, such as interest rates, inflation expectations, GDP growth, risk factors and more. As traders become more familiar with some markets, there may be other markets where similar understanding can be applied.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.