There are two basic types of earning methods in the world. Investment Markets In the first method, an individual offers services mainly in the form of time to earn capital. In the second method, an individual uses his capital to gain more capital. The second category, in technical terms, is labelled as an investment. Investments vary based on the market and the activity involved in it. In a broader sense, types of investment can be categorized into active investment and passive investment. Only active investments will be discussed in detail in this insight into investment markets.
What is Active Investment?
Active investment is a type of investment where investors or financial managers actively participate in the buying and selling assets and decision-making. Key features of active investment are:
a. Investors or their assigned managers are active during working hours and actively manage assets. Investors or managers use their knowledge and skills to manage their portfolios.
b. Active investment markets operate at specific times. Investors invest in these time frames to adjust their portfolios based on anticipated market trends.
c. Active investment depends on research, so investors must keep tracking market trends and influencing factors to adjust accordingly.
d. Investors employ multiple diversification strategies to absorb the shock created by market volatility or to adjust according to new opportunities created to maximize their profit.
e. Mostly, managers look after investors’ portfolios because investors are generally unaware of the market technicalities. They charge high fees for their services.
What is Passive Investment?
On the contrary, passive investment is a strategy that involves buying and selling financial instruments for longer periods rather than making frequent trades. In this investment strategy, an investor buys an instrument and holds it for long, also referred to as the “buy and hold” strategy. This strategy is practised in all investment markets (stock bonds, forex, etc.), but it is best suited for the real estate and commodity markets, especially the precious metals category
Types of Active Investment Markets
1. Stock Market
The most common of all financial markets is the stock market, where companies put their shares, which traders and investors trade. Companies use these shares to increase their capital and investors to raise their returns. There are two ways to earn profit from stocks. Some people buy and hold stocks to gain dividends from the company’s profits; others buy and sell shares to make a profit. The stock market is highly volatile. The risk involved, as well as returns on investments, are also high.
Generally, buying stock is relatively easy, but the challenge is buying the right stocks to earn more. In the stock market, investors make by purchasing stocks at a lower price and sell them later at a higher price. The difference between the prices is their earnings. Stocks are traded on registered exchanges, like the USA NYSE (New York Stock Exchange) and Pakistan PSX (Pakistan Stock Exchange). Moreover, the participants’ participation in stock markets includes investors, traders, brokers, and market makers. According to Visual Capitalist, global equity trading volume reached 109 trillion dollars in the second quarter of 2023. The stock market is the largest market concerning trading volume.
2. Bond Market
Bonds are secure fixed-income instruments typically issued by a company or government. A bond market is a financial marketplace where debt securities (bonds) are traded. In the bond market, investors lend money to corporations, governments, municipalities, etc. It is an agreement between the borrower and the lender. When an organization or entity issues a bond, it borrows money from bondholders (investors) for a given period; in between, they pay interest rates and, later on, the principal amount at bond maturity. These markets offer opportunities to both investors and other entities. Investors earn profits through interest rates, which help other entities finance projects or investments. Investment in bonds is generally considered a low-risk and stable investment.
3. Commodity market
These are the financial markets where consumers and producers meet to trade physical commodities (raw materials and primary products) for the exchange of money, like energy products (oil, gas, etc.), agriculture products (wheat, coffee, livestock, etc.), and metal products (gold, silver, copper, etc.). Participants in the commodity market include producers, consumers, speculators, and investors who trade futures contracts or physical commodities. A future contract is an agreement to sell a certain amount of a commodity at a future date at a predetermined price. Stock markets serve various purposes, including price discovery, risk management, and providing a platform for stakeholders in the industry to preserve value, exchange, or security for the future.
4. Forex Market
The forex market is a financial marketplace where currencies of different countries are traded. Forex is the largest and most liquid financial market, which facilitates the exchange of currencies between individuals, businesses, governments, investors, etc. This exchange occurs in pairs, like GBP/JPY or EUR/CAD, etc, where one currency is exchanged for another at agreed-upon rates. Various factors, like economic conditions, geopolitical events, market sentiments, etc., can affect currency prices. This market allows investors to make a profit 24/7 due to its global nature and poses a high risk due to its volatility.
5. Cryptocurrency Market
The cryptocurrency market is a digital financial market where cryptocurrencies (virtual currencies) are bought and sold. These markets are operated on decentralized networks based on blockchain technology. Thousands of cryptocurrencies, such as Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), etc, are available and traded globally. Cryptocurrency exchange facilitates the trading of these currencies and allows traders to swap one currency with another or any fiat currency like PKR, USD, etc. This market also allows investors to make profits 24/7 due to its global nature. Supply and demand dynamics, technological advancements, and market sentiments determine the prices of these currencies. These markets also pose a high level of risk because of their high volatility and regulatory uncertainties.
6. Money Market
A money market is a financial marketplace where financial assets and instruments with high liquidity and short-term maturities (one year or less) are bought and sold. A lower rate of return characterizes it as compared to other markets. The money market includes certificates of deposits, Treasury bills, commercial paper, etc. The participants in the money market include individual investors, financial institutions, corporations, etc. This market provides a platform for these entities to raise excess short-term funds, typically from a day to a year.
7. OTC (Over-the-Counter) Market
These are decentralized financial markets where trading occurs without a physical location and is conducted electronically. In these markets, financial assets like bonds, stocks, and currencies are bought and sold directly between buyers and sellers without a third party (a broker). These markets offer flexibility, privacy, and the ability to trade assets not listed on formal exchanges. The classical forex and commodity markets have shifted toward the OTC market by introducing independent online brokers.
The Importance of Investment Markets
Financial markets play a vital role in an economy by facilitating the exchange of financial instruments like stocks, bonds, etc.
- Financial markets help with the efficient allocation of capital. They provide a platform for investors to invest in various financial instruments.
- They offer high liquidity, allowing investors to convert their investments to cash quickly.
- Financial markets help individuals and businesses hedge against different risks, like price fluctuations and fluctuations in currency values.
- Financial markets foster economic growth by directing savings and investments toward productive use. Hence increasing entrepreneurship and job opportunities.
- Financial markets are time-saving and cost-effective, as you do not have to spend additional time and money to find potential customers for securities trading. Additionally, it reduces costs by providing valuable information about securities traded in financial markets.
Bottom Line:
Financial markets provide a platform for trading financial instruments where individuals or entities can buy and sell these instruments. These markets are highly volatile and are influenced by economic conditions, global events, market sentiments, etc. Considering the complexity and dynamism of financial markets, staying updated on market trends is very important. This article provides insight to these investment markets.
