Global financial markets: key factors when trading
OVER The last few decades, investing in global markets hasbecome more popular. Most people turn to these markets to achieve a better return on their funds, as their regular savings account does not offer much.
For someone who is contemplating venturing into such there are different types of global markets of trade to consider, namely currencies, commodities, equity market indices, treasuries, shares and industry sectors, with main focus being on shares, industry sector and equity market indices.
Shares have become more familiar with people trading today. Companies around the world issue shares to the public for reasons of gaining capital for the upgrading of their business, to gain exposure with potential customers and the public at large, sharing risk among more investors, and reducing capital costs, succession planning for founders.
Individuals today are looking to make money through the stock market by means of receiving dividend payments from a company and capital gains, which is making profit on a favourable price whether "buying low and selling high or selling high and buying back low".
Investors tend to bid on share prices when they believe positive outcomes will happen, such as improved earnings, an increase in future sales, rise in dividend payments, or new developments. The share price of the company could decline for several reasons. The most common reason for this decline is the company falling short of expectations, downward analyst revisions, or negative press releases regarding the company or industry.
Once individuals start investing, they are exposed to market as well as the individual company risk. In order to mitigate the company risk, investors should look at holding a diversified portfolio of stocks.
The 10 major industry sectors fall into four different groups: interest-sensitive; defensives; economically sensitive; and capital-spending sensitive.
Interest-sensitive companies, such as financial services, utilities and telecommunications, are interest bearing, and they tend to outperform in times of falling interest rates and underperform when rates are quickly rising.
Defensives, such as consumer staples and healthcare, are fairly stable and have predictable revenue and earning streams, while they tend to perform best when times are down and tend to underperform during stronger economic times.
Economically sensitive companies, or consumer discretionary and industrials, perform best during good times and badly during hard times, and are typically a company that can be sacrificed and a substitute used in its place. For example, clothing stores and airlines.
Capital-spending sensitive companies are growth companies, like those in energy, materials and technology, which tend to come from large-scale projects that take time to implement. Their cycle runs behind economic factors, and tends to approve large-scale projects once the economy has turned higher.
Equity market indices is another diversified financial security that an investor can gain exposure to. Instead of putting all of your funds in one stock or company, you can look at the broader spectrum and invest in countries, sectors, or industries. Examples include US SPX 500 (consumer products, financial services) in North America, UK 100 (pharmaceuticals, metals & oils) in Europe and Hong Kong 43 (real estate) in Asia Pacific. Holding an index, is like holding an aggregate of stocks, and therefore is less risky when compared to holding an isolated stock.
Meisha Edwards is a wealth advisor at Stocks & Securities Ltd. Contact: email@example.com