In the face of vague anxieties about the future, people often feel the need for good “asset management” strategies. However, many people do not know what to do and therefore cannot take the correct action in a timely manner. Therefore, certain financial literacy is required to practice asset management to the correct degree.
It will be difficult to acquire financial literacy just by living ordinarily. However, one’s financial literacy can be enhanced if you have the willingness to learn and the ability to absorb new things. That is why successful investors are constantly learning.
An overview of financial markets reveals the flow of money. Understanding the flow of money also leads to understanding how money is generated.
Price is determined by supply and demand
First, let us look at the “market characteristics” that are the premise of financial markets. In the financial market, various financial products are traded every day. If you are not familiar with finance, you may not understand the trading of stocks, bonds, ETFs, investment trusts, etc.
However, the principle is the same for all financial products. The principle is the “market mechanism” in economics, where the price is determined by supply and demand. The same goes for financial products, where prices are adjusted by supply and demand.
Strictly speaking, market mechanisms do not work like food and consumer goods, but the concept of price fluctuations due to supply and demand can also be applied to financial products. This is the reason why there is a saying that “stocks are a beauty contest”.
What are the components of a financial market?
Next, let us look at the various components of the financial markets. It can be roughly divided into three categories: the “long-term financial market,” the “money market,” and the “foreign exchange market.” The specific contents of each are as follows:
- Long-term financial markets (stock markets, etc.)
A long-term financial market is a market that deals with financial products with a trading period of more than one year. Also, the yield of newly issued 10-year bonds bought and sold in the public and corporate bond market is the so-called “long-term interest rate”.
- Money markets (open markets, etc.)
A money market is a market that deals with financial products with a trading period of one year or less. This includes the “interbank market” in which financial institutions participate, the “open market” in which non-financial institutions can participate, and the “financial futures / short-term swaps (derivatives)” derived from short-term financial transactions.
- Foreign exchange market (interbank market, etc.)
A foreign exchange market is a market that exchanges (buys and sells) a specific currency for another currency. The exchange ratio traded in the foreign exchange market is called the “foreign exchange rate”. There is also the “interbank market” and “customer market” and the foreign exchange market, and each has different participants.
Get to know the big picture of financial markets and know the essence of investment
As you can see, there are various types of financial markets. When making an investment, it is necessary to decide which market and which product to invest in. To do so, it is necessary to understand not only the current economic situation but also the characteristics of each market and financial product.
However, if your goal is asset management, you do not necessarily have to be a professional. Anyone can manage their money as long as they have some basic knowledge and are willing to learn on a daily basis. To avoid wasting money, be sure you know the flow of money from the overall picture of the financial markets.
Global market size of various financial products
Derivatives are orders of magnitude. Derivatives are financial derivative products devised as a method to reduce the risk of financial products such as stocks, bonds, deposits and savings/loans, and the foreign exchange, or to prepare for the risk and pursue high profitability. It has become an indispensable asset management method for many financial institutions and companies.
The next largest is the stock and bond markets. The gold futures market and the crude oil futures market are very small, and it can be expected that even a small amount of funds flowing from the stock market will cause large fluctuations.
Globalized financial markets
There are pre-determined rules for buying and selling these products. If the product is stocks, and the method of buying and selling are different between the United States and Japan, for example, then you cannot invest with confidence. Therefore, stocks, bonds, real estate, commodities, and foreign exchange can be bought and sold all over the world based on certain conditions and rules.
For example, the foreign exchange – New York, London, and Tokyo are known as the world’s three largest markets. The time lag means that some markets in the world are open, allowing investors to buy and sell 24 hours a day, except on holidays.